Executive Summary:
This Reserve Bank of India (RBI) circular addresses risk management practices in Non-Banking Financial Companies (NBFCs). It mandates the appointment of a Chief Risk Officer (CRO) for NBFCs with an asset size exceeding Rs. 50 billion to enhance risk management standards. The circular outlines specific instructions regarding the CRO's appointment, responsibilities, and independence. This directive modifies existing regulations outlined in the Master Direction Non-Banking Financial Company Systemically Important Non-Deposit taking Company and Deposit taking Company Reserve Bank Directions, 2016.
Key Points / Main Content:
* **CRO Appointment:**
* NBFCs with asset size of more than Rs. 50 billion must appoint a CRO.
* The CRO must be a senior official with adequate professional qualification and experience in risk management.
* Appointment is for a fixed tenure with Board approval.
* Premature transfer or removal requires Board approval and reporting to the RBI and stock exchanges (if listed).
* **CRO Independence:**
* The Board must establish policies to ensure the CRO's independence.
* The CRO must have direct reporting lines to the MD/CEO and/or the Risk Management Committee (RMC) of the Board.
* If the CRO reports to the MD/CEO, the RMC/Board must meet with the CRO at least quarterly without the MD/CEO.
* The CRO cannot have reporting relationships with business verticals or be assigned business targets.
* Dual hatting (assigning other responsibilities) is prohibited.
* **CRO Responsibilities:**
* The CRO must be involved in identifying, measuring, and mitigating risks.
* The CRO must vet all credit products for inherent and control risks.
* The CRO's role in credit proposals is limited to being an advisor.
* If the CRO participates in credit sanction committees, they have voting power and are liable for risk aspects of the credit proposal.
Impact Analysis:
* **NBFCs with asset size of more than Rs. 50 billion:**
* Impact: Must appoint a CRO and adhere to the guidelines regarding the CRO's role, responsibilities, and independence.
* Action Required: Appoint a qualified CRO, establish appropriate reporting structures, implement policies to safeguard the CRO's independence, and modify internal processes to include the CRO in risk management activities.
* **Boards of Directors of impacted NBFCs:**
* Impact: Increased oversight of risk management practices.
* Action Required: Approve the CRO appointment, define the CRO's tenure, establish reporting lines, implement policies to protect the CRO's independence, and ensure the CRO's involvement in risk management processes.
* **Chief Risk Officers (CROs) of impacted NBFCs:**
* Impact: Clearly defined role and responsibilities related to risk management.
* Action Required: Fulfill the responsibilities outlined in the circular, including risk identification, measurement, and mitigation, and ensure independence from business verticals.
* **Reserve Bank of India (RBI):**
* Impact: Enhanced regulatory oversight of risk management practices in NBFCs.
* Action Required: Monitor NBFC compliance with the circular's requirements and take appropriate action in case of non-compliance.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and monetary policy.
Non-Banking Financial Company: A financial institution that provides banking services without holding a banking license.
Chief Risk Officer: A senior executive responsible for identifying, assessing, and mitigating risks within an organization.
Infrastructure Finance Companies: NBFCs that primarily lend to infrastructure projects.
Micro Finance Institutions: NBFCs that provide small loans and financial services to low-income individuals or groups.
Infrastructure Debt Funds: Investment vehicles that raise debt to finance infrastructure projects.
Risk Management Committee: A committee of the board responsible for overseeing the risk management practices of the NBFC.
Mumbai, Maharashtra: A city in Maharashtra, India, mentioned as the location of the Reserve Bank of India's Central Office.
भारतीय �रज़वर् ब�क
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2018-19/184
DNBR (PD) CC. No.099/03.10.001/2018-19 May 16, 2019
Non-Banking Financial Company– Investment and Credit Companies, Infrastructure Finance
Companies, Micro Finance Institutions, Factors and Infrastructure Debt Funds
Madam / Dear Sir,
Risk Management System – Appointment of Chief Risk Officer (CRO) for NBFCs
With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs
to augment risk management practices. While Boards of NBFCs should strive to follow best
practices in risk management, it has been decided that NBFCs with asset size of more than
Rs.50 billion shall appoint a CRO with clearly specified role and responsibilities. The CRO is
required to function independently so as to ensure highest standards of risk management.
2. The NBFCs shall strictly adhere to the following instructions in this regard:
a) The CRO shall be a senior official in the hierarchy of an NBFC and shall possess
adequate professional qualification/ experience in the area of risk management.
b) The CRO shall be appointed for a fixed tenure with the approval of the Board. The CRO
can be transferred/ removed from his post before completion of the tenure only with the
approval of the Board and such premature transfer/ removal shall be reported to the
Department of Non-Banking Supervision of the regional office of the Bank under whose
jurisdiction the NBFC is registered. In case the NBFC is listed, any change in incumbency of
the CRO shall also be reported to the stock exchanges.
c) The Board shall put in place policies to safeguard the independence of the CRO. In this
regard, the CRO shall have direct reporting lines to the MD & CEO/ Risk Management
Committee (RMC) of the Board. In case the CRO reports to the MD & CEO, the RMC/ Board
shall meet the CRO without the presence of the MD & CEO, at least on a quarterly basis.
The CRO shall not have any reporting relationship with the business verticals of the NBFC
and shall not be given any business targets. Further, there shall not be any ‘dual hatting’ i.e.
the CRO shall not be given any other responsibility.
d) The CRO shall be involved in the process of identification, measurement and mitigation of
risks. All credit products (retail or wholesale) shall be vetted by the CRO from the angle of
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फोन: (+91-22) 22161940फैक्स:(91-22) 22150540, Email: cgmdnbrco@rbi.org.in
Department of Non-Banking Regulation, Central Office, 2nd Floor, Centre-I, World Trade Centre, Cuffe Parade, Colaba, Mumbai – 400005, India
Tel.: (+91-22) 22161940 Fax: (91-22) 22150540, Email: cgmdnbrco@rbi.org.in
�हंदीआसानह,ै इसका�योगबढाइये।inherent and control risks. The CRO’s role in deciding credit proposals shall be limited to
being an advisor.
e) In NBFCs that follow committee approach in credit sanction process for high value
proposals, if the CRO is one of the decision makers in the credit sanction process, the CRO
shall have voting power and all members who are part of the credit sanction process, shall
individually and severally be liable for all the aspects, including risk perspective related to the
credit proposal.
3. Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 has been
modified accordingly.
Yours faithfully,
(Manoranjan Mishra)
Chief General Manager