IndiaCorpLaw

Chief Risk Officer: Strengthening Risk Management Practices

[Kanakprabha Jethani is with Vinod Kothari Consultants Private Limited]

The Reserve Bank of India (RBI) issued a notification on 16 May 2019  requiring non-banking finance companies (NBFCs) having an asset-size exceeding the prescribed threshold to appoint a Chief Risk Officer (CRO) with clear roles and responsibilities to oversee their risk management practices. The CRO shall be required to function independent of the structure of the organisation. Observing the increasing role of NBFCs in direct credit intermediation and the risks it poses to the market as well as banks which lend money to these NBFCS, this was a vital step to be taken by the Reserve Bank of India (RBI) in a timely manner. This post sheds light on need for this notification, the role of a CRO, and other regulatory provisions relating to appointment of the CRO.

Need for this Notification

NBFCs serve credit requirements of entities that are not served by banks. They are considered as crucial sources to the growth of the economy due to their expanded credit reach in the market. This is because they have lesser compliance requirements to abide by, and their operations are not limited by credit constraints as that of banks. Since decades, NBFCs have experienced light regulation considering their “need to grow”. This legacy of light regulation has built up a risk intersection between banks and NBFCs, where the credit risk of NBFCs is shared by banks through lending to NBFCs and the business risk is created by banks on NBFCs by denying them lending. This intersection has fatal effects on the economy and there is a need to separate these risks, at least to some extent. The RBI has achieved the balance between growth and risk by taking this crucial move in direction of toning down the risk exposure of NBFCs.

Applicability of the Notification

The above notification has been issued in line with circular for appointment of a CRO by banks named Risk Management Systems – Role of the Chief Risk Officer (CRO). This notification shall be applicable to NBFCs having an asset-size of more than Rs. 50 billion, functioning in following categories:

Here, two kinds of companies will fall under purview of this notification:

It is noticeable that the RBI has not yet prescribed any time limit for the appointment of a CRO. However, it is advisable for category one companies to take up this matter in the forthcoming board meeting and pass resolution for the same. Category two companies should appoint the CRO in the board meeting immediately after the threshold is crossed.

Actions to be Taken Pursuant to this Notification

Appointment of CRO

Putting Matters in Place

Role of the CRO

Reporting

Conclusion

This initiative by the RBI is likely to trim the extent of vulnerability of NBFCs in the credit market. This move is expected to freeze the ongoing rating downgrades of NBFCs and prune the fears of liquidity crisis in the market. This notification has been just the right mechanism for the current scenario. Compliance of this requirement in letter and spirit will put NBFCs in a better standing of its credit operations. This is in line with the guidelines for risk management for banks issued by the RBI in 2017.

Kanakprabha Jethani