The RBI has so far resisted demands to open a special liquidity window for the benefit of NBFCs hobbled by asset-liability mismatches (ALMs) and the inability to access bank funds cheaply.
The Reserve Bank of India (RBI) will set up a specialised supervisory and regulatory cadre to strengthen these functions with respect to banks and non-banking financial companies (NBFCs). The decision was taken on Tuesday at a meeting of the RBI’s central board in Chennai, chaired by governor Shaktikanta Das and attended by the four deputy governors and nine of the other 13 directors on the board.
“With a view to strengthening the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies, the board decided to create a specialised supervisory and regulatory cadre within the RBI,” the central bank said in a statement. “Other matters discussed by the board included, inter-alia, issues related to the currency management and banker to government functions of the RBI,” the statement added.
The board also reviewed the current economic situation, global and domestic challenges and various areas of operations of the RBI. Among other matters, the board discussed the medium term strategy document, covering the mission statement and the vision statement.
In addition, the central board reviewed the present structure of supervision in the RBI ‘in the context of the growing diversity, complexities and interconnectedness within the Indian financial sector.”
The decision to step up RBI’s supervisory and regulatory functions comes amid a situation of liquidity tightness for NBFCs and downgrades of some of their debt instruments. The crisis emerged after some entities from the Infrastructure Leasing & Financial Services (IL&FS) group defaulted on repayments in mid-2018. The repayments were followed by rapid downgrades to default grade. The contagion soon spread to other NBFCs, leading to downgrades for the likes of Dewan Housing Finance (DHFL), Reliance Commercial Finance and Reliance Home Finance.
The RBI has so far resisted demands to open a special liquidity window for the benefit of NBFCs hobbled by asset-liability mismatches (ALMs) and the inability to access bank funds cheaply. Instead, it has stuck to its policy of infusing liquidity through bond purchases.
Earlier, the central bank had come in for criticism with respect to its supervisory role when the `14,000-crore letter-of-undertaking (LoU) fraud broke at Punjab National Bank (PNB) in 2018.