RBI may ask banks to set up cells to monitor large-value credit exposures

The Reserve Bank of India is likely to ask banks to set up dedicated cells for market intelligence and monitoring large credit exposures. This is expected to address issues relating to large divergences observed in asset classification and provisioning in banks’ credit portfolios vis-à-vis RBI’s supervisory assessments and the rising incidence of frauds.

The central bank may also direct banks to leverage data analytics more to monitor credit exposures (funded and non-funded).

To manage the operational risks inherent in the functioning of banks, the RBI’s five-member expert committee on non-performing assets and frauds, headed by YH Malegam (former member of the Central Board of Directors of the RBI), has made these recommendations.

Proactive intelligence

Referring to the tendency of banks to rely on forensics and market intelligence only after a fraud has occurred, the committee emphasised that they, in fact, need to rely on such intelligence at a very early stage even while making a credit decision.

The committee observed that a market intelligence unit/cell (MIU), with a focus on large borrowers, would facilitate the collection and processing of such information, prevent adverse selection of borrowers and throw up early warning signals of possible fraud or credit risks, both at the sanctioning stage and during the monitoring of the account.

Given that financial records may be manipulated and financial statements may be intentionally misleading, the committee felt that is important for banks to supplement due diligence with market intelligence. While recommending that all banks should have a dedicated MIU attached to their risk management departments, the committee said the unit should include personnel trained in forensic auditing.

Current set-ups inadequate

Though most banks surveyed by it had a monitoring department, the committee came across several instances of inadequacte monitoring of large-value accounts in its review of the 20 largest credit fraud cases.

While monitoring of all credit facilities is important, it assumes greater significance in the context of large-value accounts where the consequences of fraud can be significant. Hence, the panel recommended a dedicated cell in the monitoring departments of banks for large-value credit exposures.

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