RBI tightens oversight of NBFCs, UCBs

Regulator strengthens audit norms for urban cooperative banks, non-bank lenders in moves to bolster financial stability

The Reserve Bank of India (RBI) on Friday announced the introduction of risk-based internal audit norms for large urban cooperative banks (UCBs) and non-banking financial companies (NBFCs), as part of measures aimed at improving governance and assurance functions at supervised entities.

The RBI also moved to harmonise the guidelines on appointment of statutory auditors for commercial banks, UCBs and NBFCs in order to improve the quality of financial reporting.

Observing that the growing significance of NBFCs and their interlinkages with different parts of the financial system had made it imperative to enhance the sector’s resilience, RBI Governor Shaktikanta Das said, it had been decided to put in place transparent criteria for the declaration of dividends by different categories of NBFCs.

Systemic risk potential

“Further, the current regulatory regime for the NBFC sector, built on the principle of proportionality, warrants a review,” Mr. Das said. “It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward,” he added.

The RBI would remain strongly committed to preserving the stability of the financial sector and would do whatever was necessary, the Governor asserted.

“While we are constantly focussed on strengthening the regulations and deepening our supervision, financial sector entities like banks and NBFCs should also give highest priority to quality of governance, risk management and internal controls,” Mr. Das stressed. “They are the first line of defence in matters relating to financial sector stability,” he said.

With a view to deepening financial markets, regional rural banks would be allowed to access the liquidity adjustment facility (LAF) and marginal standing facility (MSF) of the RBI, as also the call/notice money market.

Secure digital payments

To significantly improve the ecosystem of digital payment channels with robust security and convenience for users, the RBI has proposed to issue Digital Payment Security Controls directions for the regulated entities.

“These directions will contain requirements for robust governance, implementation and monitoring of certain minimum standards on common security controls for channels like Internet and mobile banking and card payments,” he said. Justifying the RBI’s action on HDFC Bank, he said there was a need for all banks and financial entities to invest more in their IT systems so that public confidence was maintained.

On an RBI panel’s recommendation that corporates may be allowed to open banks, Mr. Das said, “The report of the internal working group is now in the public domain. We will receive comments. After getting comments from various stakeholders we will examine the whole matter and take a considered decision. That is how it stands”.

He also indicated that the crisis at Punjab & Maharashtra Cooperative Bank (PMC) appeared headed for an early resolution based on a positive response from prospective investors.

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