The Reserve Bank of India has decided to operationalise 'unified departments for supervision and regulation' with effect from November 1, 2019, in a bid to strengthen its oversight of commercial banks, urban co-operative banks (UCBs) and non-banking financial companies (NBFCs).

This move comes in the backdrop of scams hitting the financial system in the last couple of years, including the ₹12,600-crore fraudulent letter of undertaking scam at Punjab National Bank; debt default by IL&FS and its arms; the recent revelation of ₹4,335-crore loss being caused to Punjab and Maharashtra Co-operative (PMC) Bank due its alleged single large exposure to the bankrupt HDIL group; and cyber-security related incidents.

According to sources, a unified Department of Supervision (DoS) is being established by merging all supervisory departments — department of banking supervision, department of co-operative banking supervision, and department of non-banking supervision into one department.

Further, a unified Department of Regulation (DoR) is being created by merging all regulatory departments — department of banking regulation, department of co-operative banking regulation, and department of non-banking regulation into one department.

To begin with, the staff attached to the above mentioned supervisory and regulatory departments will continue in DoS and DoR in their existing capacity on an ‘as-is-where-is’ basis. The present sanctioned strength in the existing supervisory and regulatory departments respectively will form the sanctioned strength of the new departments — DoS/DoR.

Underscoring the need to understand the systemic linkage between banks (Scheduled Commercial Banks and cooperative banks) and NBFCs, and their interconnectedness, the central bank, in its latest annual report, said certain functions of supervisory departments are proposed to be integrated.

This is aimed at enabling holistic understanding of systemic risks; understanding linkages, contagion and risk build-up across entities for effective off-site monitoring; and identifying systemic early warning signals based on entity-agnostic thematic studies.

The report also said the central bank will have a dedicated and specialised cadre of officers for ensuring a state-of-the-art supervisory framework for banks. Supervisory focus would be on effective risk discovery and better off-site monitoring through leveraging technology.

The RBI’s regulatory departments currently look after licensing, branch expansion and maintenance of statutory reserves, management and methods of operations; approval for setting up of subsidiaries and undertaking of new activities; and laying down norms for prudential regulation, among others.

The core functions of the supervisory departments currently include planning and undertaking of inspection for supervisory evaluation; off-site surveillance, monitoring/taking action with respect to banks falling under the Prompt Corrective Action framework; dealing with financial sector frauds; and framing policy and supervising the cyber-security infrastructure and operations of regulated entities.