RBI sets up cell to monitor 12 large banks

The Reserve Bank of India has formed a conglomerate cell within its supervisory set-up to keep a constant vigil on 12 large domestic and foreign banks. This is to prevent any systemic fallout in case one of them falters.

The banks that have been identified for consolidated supervision are: State Bank of India, Punjab National Bank, Canara Bank, Bank of India, and Bank of Baroda (public sector banks); ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank (private sector banks); and Standard Chartered Bank, Citibank and HSBC (foreign banks).

The cell will assess the risks that non-banking activities — insurance, asset/wealth management, broking, investment banking, housing finance, and primary dealership — could pose to the parent bank.

It will also keep a watchful eye to prevent regulatory arbitrage, said a senior official with one of the conglomerate banks.

To ensure that the safety and soundness of the banking system is not compromised, the cell will actively monitor these banks' exposure to financial markets — such as call money, foreign exchange (including currency futures), government securities (including interest rate futures), corporate bonds and equities — to pick up possible smoke signals.

Surveillance streamlined

Onsite inspection and offsite surveillance have been streamlined to gather, among others, information on compliance with credit exposure limits, and assess risks (credit, operational, market, interest rate, liquidity, and country) and compliance with corrective actions suggested by the RBI, the official said.

Creating a profile

Further, quantitative and qualitative disclosures in balance-sheets, ownership structure, adherence to accounting policies and principles, compliance with anti-money laundering guidelines, and adherence to prudential prescriptions on capital adequacy will be taken into account to create a profile of each bank.

Collectively, the 12 conglomerate banks are estimated to account for about half of the total assets of the banking system.

They are considered systemically important as they have grown so large and are so interconnected that even if one bank goes belly up, the other banks will feel the adverse ripple effects and the stability of the financial system could get undermined.

Besides the conglomerate cell, the central bank's supervisory architecture for banks now has three other verticals, each dedicated to the supervision of ‘other public sector banks', ‘other private sector banks' and ‘other foreign banks'.

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