With crisis engulfing the non-banking financial company (NBFC) sector, the Reserve Bank of India (RBI) on Thursday asked finance companies with asset size more than Rs 5,000 crore to appoint a chief risk officer (CRO), who will function ‘independently to ensure the highest standards of risk management’.

The RBI in a statement said the CRO has to be a senior official in the hierarchy of an NBFC and will be appointed for a fixed tenure, with the approval of the board of the NBFC. The CRO shall be involved in the process of identification, measurement, and mitigation of risks. Moreover, all credit products of NBFCs — whether retail or wholesale — have to be inspected by the CRO, but his role in deciding credit proposals shall be limited to being an advisor.

The RBI said the CRO will be entitled to voting rights in finance companies which use a committee structure to clear high-value loans with CRO as panel member. Plus, all members of the panel will be liable for all aspects, including risk perspective related to the credit proposal.

The RBI has said the CRO will report directly to the managing director (MD) & CEO/Risk Management Committee (RMC) of the board. In case the CRO reports to the MD & CEO, the RMC/board should meet the CRO without the presence of the MD & CEO, at least on a quarterly basis, the RBI added.

The RBI has made it clear that the CRO shall not have any reporting relationship with the business verticals of the NBFC. They shall not be given any business targets and not be given any other responsibilities.

Many NBFCs have been under stress following the beleaguered Infrastructure Leasing & Financial Services (IL&FS) group defaulting on its debt obligations, triggering panic in the financial markets. Since then, the NBFCs have been struggling to get funds for their operations, as banks and mutual funds have been very cautious lending to them.

Moreover, the cost of borrowing for these entities has also gone up. Now, they are relying more on retail bond issuances, external commercial borrowings, masala bonds, and securitisation for funds.

The asset-liability mismatch, wherein the NBFCs were borrowing in the short term and using the money to give long-term loans, was exposed because of the IL&FS defaults. This engulfed many NBFCs/housing finance companies, causing them to virtually stop lending, so as not to weaken the balance sheet any further.