Vault Matters: Why RBI should play a more proactive role as a supervisor

Reserve Bank of India

The concept of senior supervisory managers, or SSMs, is over a decade old. They are meant to be the eyes and ears of the Reserve Bank of India across banks and now even non-banking finance companies. The role and relevance of SSMs came to fore after the asset quality crisis which ended around 2019.

Expected to maintain a vigilant watch over the operations of a financial institution on a periodic basis (or even daily basis in case of some large banks and NBFCs), SSMs today have instilled a sense of right and wrong, and acceptable and unacceptable across the spectrum. To such an extent that, sometimes, there is an opinion among bankers that they may perhaps be overdoing it.

Especially when bandwidth of a bank’s senior management is consumed in responding to why soiled currency notes of Rs 20,000 were issued by a branch, or why a mundane circular was not stuck on the walls of a branch in a prominent manner and so on.

Ironically though, despite the hawk eyes of SSMs, instances such as IndusInd Bank’s frauds have happened. While one is still waiting for the real truth to emerge, the preliminary report from Sebi suggests that the former MD & CEO of the bank, also a member of the then constituted board, may have been in know of the accounting lapses months before it was made public.

Post this fiasco, there are news articles around how the regulator's plans to increase supervision on a bank’s board. This could involve reviewing minutes of board meetings in a microscopic manner or asking for video recordings of the board proceedings. Either ways, it might just be a post mortem of what happened and fixing responsibilities after the damage is done.

If the objective is to prevent the occurrence of damage, SSMs or RBI representatives need to amp up their supervisory techniques – make it more proactive and not reactive.

How about involving the SSM as an observer in critical meeting of the board or at least the key subcommittees such as the Audit Committee Board (ACB) meeting? From a regulatory lens, ACB is heart of assessing the financial stability and soundness of a bank. A lot of routine accounting lapses may be spotted and corrected at the start if the SSM is kept in the loop from the beginning. What this could also do is ensure that banks and/or NBFCs don’t walk the path of growth at any cost, comprising the fundamental principles of accounting or the intent of laws and regulations.

Taking the case of IndusInd Bank once again, much of the mess in its microfinance portfolio seems to have been caused because of the bank’s ambitions to show growth at any cost and bad practices continued for a long time because cracks shouldn’t appear on the wall. Many of the issues at Yes Bank prior to March 2020 could have also been averted had the role of SSM been more proactive than reactive.

Of course, this suggestion could be immediately countered by banks on the premise that it would tantamount to the regulator interfering with the operations of the bank. That is not within the realms of authority and rightly so. But in this case as an observer or a passive listener to certain proceedings, the SSM is just like a CCTV fitted in the room. It’s better to have a live assessment of the discussions rather than analysing it post-dated. But yes, this would also mean that the skill and knowledge of SSMs be upgraded by notches and that’s a completely different conversation to have!