RBI diktat on Chief Risk Officer provides cover to NBFC bosses

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Published: May 20, 2019 12:30:23 AM

It is in this context that the central bank has asked NBFCs to appoint Chief Risk Officers (CROs) and to ensure that they are insulated from various pressures.

RBI diktat, Chief Risk Officer, NBFC bosses, IL&FS default, RBI,Sebi,  Credit SuisseIt is estimated that mutual funds have trimmed NBFC exposure to 27% of AUM (from 34% in Aug-2018) with exposure to NBFC commercial paper down 40%.

Though the problems associated with the IL&FS default, and its loans of over Rs 100,000 crore, are still very large, there can be little doubt that deft handling of the situation by the government and RBI ensured the country’s financial system didn’t freeze up and there was no contagion despite the IL&FS exposure across various sectors. But, even those who felt India had dodged—at least, for now—a bullet wouldn’t have envisaged that the rot spread so deep and so wide, or that so many other large NBFCs would have such large exposures. In a note last month, Credit Suisse estimated that, of the exposure to four stressed groups that AMCs have, 11% or roughly Rs 2,200 crore is through close-ended plans aggregating Rs 18,000 crore; around 56% of this is up for maturity in Q1FY19. It is estimated that mutual funds have trimmed NBFC exposure to 27% of AUM (from 34% in Aug-2018) with exposure to NBFC commercial paper down 40%. But there is a need to be watchful since mutual funds have a Rs 320,000 crore exposure to NBFCs (including housing finance companies) and Rs 130,000 crore of this matures over the next three months.

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It is in this context that the central bank has asked NBFCs to appoint Chief Risk Officers (CROs) and to ensure that they are insulated from various pressures. So, for instance, any premature transfer/removal of the CRO is to be intimated to RBI’s department of non-banking supervision. Similarly, the NBFC’s risk management committee and/or board is to meet the CRO once a quarter without the NBFC’s MD/CEO being present, all credit products are to be vetted by the CRO and the CRO will even have voting power if s/he is one of the decision-makers in the credit-sanction process. But why is the central bank getting into micro-management? Risk-management is part of the NBFC’s job, whether it does it through a risk officer is its internal matter; if RBI feels not enough risk-mitigation is being done, it needs to tighten the rules, ask for more provisioning or other mitigation steps. By mandating the CRO as central to the NBFC’s functioning, in effect the central bank is making the CRO responsible for everything that goes wrong; surely that is the job of the MD/CEO and the board? In the NSE co-location case that Sebi ruled on recently,for example, the stock exchange’s bosses—Ravi Narain and Chitra Ramakrishna over different periods—argued that they never understood technology and so didn’t understand that the technology allowed favourable treatment to a few brokers. In its order, Sebi said this was not acceptable and that they had to take responsibility. It is easy to see how, in the future, various NBFC bosses will now try and pass off the blame to the CRO.

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