Large financial firms will be closely monitored: RBI

Considering the multi-national presence of large financial institutions and their role in the current global economic environment, the Reserve Bank of India (RBI) is keeping a close watch on such institutions in the country.

The central bank has set up a ‘financial conglomerates monitoring division’, which is currently overseeing twelve institutions that account for 53 per cent of the banking sector’s total assets.

RBI Governor D Subbarao on Monday said many Indian banks had grown to become ‘financial conglomerates’, and this posed regulatory challenges like the absence of an adequate legal framework and a limited inter-regulatory co-operation framework. He said the central bank had started carrying out stress tests under various scenarios, as part of the half-yearly financial stability reports.

“An important task would be drawing up resolution plans that explicitly take into consideration information on inter-linkages among institutions,” Subbarao said, while addressing the International Association of Deposit Insurers conference in Jodhpur on Monday.

To minimise the depositors’ woes in case of a bank failure, the central bank has asked the government to exempt bank mergers from the provision in which the Competition Commission’s approval is required. “The commission has been allowed up to 210 days to decide on it before the default clause kicks in. This further complicates the resolution of banks through mergers and the uncertainty can be potentially destabilising,” Subbarao said.

There is a need to review whether granting an extended mandate to the Deposit Insurance and Credit Guarantee Corporation (DICGC) in resolution of failing banks would help in faster settlements to depositors and lower costs, he said.

He added the dual control led to delays in resolution of urban-cooperative banks--- the appointment of liquidators, gathering of information about depositors, depositor payouts and the recovery of assets. The central bank shares supervisory authority with central or state governments.

Subbarao said DICGC funds were largely used for the payout of urban co-operative banks, though commercial banks were the major contributors to the funds. He said, “The fund maintained by DICGC appears adequate, but it is not clear whether the fund would be able to meet claims arising from the putative failure of a couple of small or medium sized commercial banks.”