RBI seeks cross-border supervision

According to sources close to development, RBI is planning to enter into a memorandum of understanding with overseas regulators in order to supervise the Indian entities.

Indian entities operating overseas are, at present, regulated and supervised as per the norms of the regulator in that particular country. In India, the books of overseas entities of Indian banks are supervised on a consolidated basis, besides inspection of the Indian parent company.

Although the Indian banks are not directly affected by the global sub prime crisis, their investment books have taken a hit due to the widening of spreads on bonds and loans raised by Indian companies overseas.

Most Indian banks have invested in credit default swaps (CDS) on such products. CDS, a derivative products is bought by a bank as a hedge against possible credit default by a borrower.

Meanwhile, with increasing involvement of Indian banks and companies in the financial sector, the regulator proposes to tighten the norms for conglomerate supervision.

A conglomerate is one that has diversified into the insurance sector with a business of over Rs 100 crore or is among the top 70 per cent mutual funds in terms of assets under management.

Sources said that cap for selection of companies as conglomerates may be lowered or the functions could be increased to ensure a wider coverage under supervision. The list of conglomerates to be supervised may thus go up.

Currently, conglomerates are banks and companies which offer multiple financial services ranging from broking, insurance, mutual funds, banking and primary dealership and thus pose systemic risk to the financial system.

In 2004-05 , an inter-regulator committee set up by RBI, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority (Irda) identified such systemically important financial institutions and laid norms for their supervision.

The supervision of such entities is important since capital has become an important requirement for all such entities. Sources said, there is a scope for transferring funds from one entity to another if the need arises.

Conglomerate supervision has already started in a limited manner, with major conglomerates such as the Tatas, the Birlas and the Bajaj group.

There are non-banking financial companies such as Reliance Capital, GE Capital, Sahara and HDFC, banks including Bank of India, ICICI Bank, Punjab National Bank, Kotak Bank, Bank of India, Bank of Baroda, Citibank, Standard Chartered Bank, Corporation Bank and IDBI Bank, and broking houses including DSP Merrill Lynch.