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On 16th May 2019, the Reserve Bank of India (RBI) made it mandatory for Non-Banking Financial Companies having asset size more than Rs. 5,000 cr to appoint Chief Risk Officer (CRO) to ensure risk management practices. This step has been taken to inundate the fear of liquidity crisis in the NBFC sector as the role of NBFCs is increasing day by day.
Here are the following requirements which need to be fulfilled for the appointment of Chief Risk Officer (CRO) in NBFC:
Such an officer shall be involved in the process of risk identification and risk mitigation. Besides this, CRO will inspect the credit product of the NBFCs, whether retail or wholesale. However, the role of the CRO will be limited to being an advisor in deciding credit proposals. In NBFC, there will be a voting right with the CRO. A committee will be structured for clarification on high-value loans with CRO. Other members of the committee will also be liable for the credit proposal aspects.
As per the RBI, The reporting of the Chief Risk Officer (CRO) will be direct to the managing director (MD) & CEO/Risk Management Committee (RMC) of the board. While in case reporting is made to the MD & CEO, then there will be a quarterly meeting of the CRO with the Risk Management Committee (RMC) / board without the presence of the MD & CEO.
The transfer or removal can take place even before the completion of the prescribed tenure by taking the approval of the board. However, such removal or transfer has to be reported to the “Department of non-banking supervision” of the regional office of the RBI under whose jurisdiction such NBFC is incorporated.
As you know, after Infrastructure Leasing & Financial Services (IL&FS) Crisis, NBFCs are under stress which is creating panic in the financial market of India. In the IL&FS case, the asset-liability mismatch was exposed as NBFCs were borrowing short-term loans to issue long-term loans.
Since then, it has become a struggle for NBFCs to get funds for their operations because now banks and mutual funds take care when it comes to lending to NBFCs.
Therefore the cost of borrowing is quite high for NBFCs. This forced them to get relayed upon retail bond issuances, external commercial borrowings, masala bonds, and funds securitization. This step was necessary to be taken by the authority to mitigate the risk.
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