Indian central bank to step up scrutiny of shadow lenders and local banks

Shaktikanta Das, the Reserve Bank of India governor. Reuters

The Reserve Bank of India will undertake closer scrutiny and auditing of shadow lenders and large urban co-operative banks in a bid to improve supervision of the financial sector.

The central bank will implement risk-based audits at shadow lenders and urban co-operative banks that focus on localised lending, governor Shaktikanta Das said on Friday.

It will also harmonise guidelines relating to the appointment of auditors across all types of lenders.

The tighter scrutiny comes after India’s financial sector was rocked by a shadow banking crisis that led to the bankruptcy of two major finance firms and the rescue of a couple of banks. The debacle added to bad loans at the nation’s banks, which are estimated to swell to a two-decade high of 12.5 per cent of credit by March.

“Our supervisory focus in improving governance and assurance functions in supervised entities continues to engage the attention of the RBI,” Mr Das said after keeping key interest rates unchanged as expected.

To date, the RBI has focused such audits on traditional banks and large shadow lenders.

In the recent past, weakness in business units, risk management and internal audits have proved to be a “major fault line” affecting some lenders, Mr Das said in his statement.

The central bank will also put in place minimum security standards for payment systems, following a surge in digital transactions during the pandemic.

The RBI gives “highest importance to the security controls” and will develop guidelines to ensure customers can use digital payment products in a safer manner, Mr Das said.

The proposals come a day after the RBI imposed rare curbs on HDFC Bank’s digital initiatives following a series of technical glitches at the private-sector lender.

Mr Das urged all financial entities to spend more on technology.

“Public confidence in digital banking has to be maintained,” he said at a virtual briefing. “If you want to remain competitive in coming years, technology robustness is the key.”