RBI empowers CRO office: Endeavour to make NBFCs bullet proof!

Over the years, the credit and risk functions in banks have assumed monumental importance for the regulators, investors and internal stakeholders. The credit for empowering these functions can squarely be attributed to the regulator. The next in line for risk based supervisory assessments are NBFCs/SFBs. To ensure the independence of CRO office, RBI has mandated a few things for NBFCs, which have gone un-noticed. I feel market participants require better awareness about this landmark circular; regulators across the world are yet to accord this level of importance to the CRO office.

From being mere mid and back office roles, Risk offices are now playing an important part in the decision-making process in progressive banks. Overall, it has done wonders to the banking sector despite causing some shake out and occasional heart burn.

Compared to banks, NBFCs have thus far escaped the intensive supervision of the regulator. RBI has gone one step ahead to empower the risk function vide its circular dated May 2019, for large NBFCs. This circular will have far reaching implications for NBFCs and it effectively makes the CRO the eyes and ears of the regulator – CRO would be independent of business targets and report to the board. The salient responsibilities of the CRO of an NBFC are as follows –

a. CRO shall be appointed for a fixed tenor with the approval of the board.
b. Any transfer / removal of CRO by the approval of the board has to be reported to RBI and stock exchanges (in case of listed entities).
c. Board shall place policies to safeguard the independence of CRO.
d. Risk Monitoring Committee of the board shall meet the CRO in the absence of MD&CEO – to ensure unbiased-views are solicited.
e. CRO has be involved in the process of identification and mitigation of risks.

The regulator has made a high decibel statement about the CRO’s independence and has put a lot of onus on the boards of NBFCs. Importantly, the circular implies that CRO office cannot be subordinated to any other department. However, I feel the regulator has stopped a tad short of empowering the position enough. RBI has kept the CRO’s office at arms-length from the decision-making process of credit proposals. Over the years I have observed that lenders are smart enough to exploit any gaps in the policy and driving Price/BV of shares takes precedence.

I am not in favour of super-imposing powers for the risk office, however, limiting the role to commentary on risk mitigation for risky proposals exists only in theory. The credit underwriting offices in NBFCs are yet under the purview of business units and are not able to independently exercise their credit delegations judiciously. Risk mitigation articulated in the last pages of the credit memorandum is merely ‘couched English’. NBFCs are just starting this transformative journey and are behind the banks in the curve. As this is a transformation process, Risk office should also act responsibly and not become a hinderance to business units. Having said this, all kudos to RBI for these bold and progressive measures, which will lead to a very sound and robust NBFC sector.