Usha Thorat: Indian perspective on banking regulation
Address by Mrs Usha Thorat, Deputy Governor of the Reserve Bank of India, at the
International Conference on "Financial Sector Regulation and Reforms in Asian Emerging
Markets", jointly organised by the Asian Development Bank Institute, Cornell University and
the UK Foreign Services Office, Mumbai, 8 February 2010.
* * *
Assistance provided by Mr P R Ravi Mohan, Mr A K Misra and Mr Tulasi Gopinath is gratefully acknowledged.
1. I am delighted to participate in this Conference on "Financial Sector Regulation and
Reform in Asian Emerging Markets" jointly organised by the Asian Development Bank
Institute, the International Center for Financial Regulation, the UK Foreign and
Commonwealth Office and the Brookings Institution. In the session that just concluded, we
heard about financial sector developments in emerging markets. In this session, I will like to
present the Indian perspective on banking regulation.
2. I have structured my presentation in four parts. To start with, I would like to quickly
recapitulate the key factors that contributed to the current global financial crisis and follow it
with a brief account of the international regulatory response. Thereafter, I will take up the
Indian banking and regulatory scenario - both pre- and post-crisis, including the recent
regulatory initiatives. Finally, I hope to place before you the emerging challenges in banking
regulation as India aspires for higher growth.
3. The current financial crisis has led to the worst global economic downturn in over
60 years. Though the epicentre of the crisis lay in the sub-prime mortgage market in the US,
it was transmitted rapidly throughout the globe, destabilizing financial markets and banking
systems. The crisis eventually impacted the broader macro-economy, affecting economic
growth and employment throughout the world. The magnitude of this crisis has clearly
signaled the need for major overhaul of the global financial regulatory architecture. The G-20
leaders have mandated the international regulatory agencies and standard-setters, including
Basel Committee on Banking Supervision (BCBS), Financial Stability Board (FSB) and
International Accounting Standards Board (IASB) to take active part in this process.
Responding to the unfolding situation, international regulatory agencies are working on
strengthening the resilience of financial system, especially on bridging the gaps in the
regulatory framework revealed by the current crisis.
Key factors in global financial crisis
4. The genesis of the recent global financial crisis can be traced back to an extended
period of global imbalances, easy monetary policy, low real interest rates and under-pricing
of risk as liquidity chased yields. It was also the period of low inflation and robust growth - an
almost "nirvana" like situation. This benign environment prompted investors to extend their
search for yield further down the credit quality curve, reflecting overly optimistic assessments
and lack of due diligence in assessing credit risk. Partly in response to this demand, the
financial system developed new structures and created new instruments, with embedded
leverage, that seemed to offer higher risk-adjusted yields, but were in fact more risky than
they appeared to be. In this setting, more-than-warranted faith began to be placed on market
discipline reflecting the prevailing optimism with increasing reliance on the assessments of
credit rating agencies. The financial sector compensation system based on short-term profits
facilitated reinforcing the momentum for risk taking. A constellation of regulatory practices,
accounting rules and incentives magnified the credit boom ahead of the crisis. The same
factors accelerated the downturn in markets and intensified the crisis. Macroeconomic
stability and financial stability were generally treated as separate and unrelated constructs
with the former focusing on preserving low and stable inflation, while the latter dealing with
the firm-level supervision of the formal banking sector. In this process, not only was the
growing shadow financial sector ignored, but also the factors such as the interconnectedness
within the complex financial system, the systemic risk arising out of too-big-to-fail entities and
system-wide liquidity needs.
Blueprint for regulatory reforms - international agenda
5. The broad contours of the international initiatives on regulatory reforms envisage
strengthening the quality of capital and risk coverage, introducing minimum liquidity
standards and leverage ratio, countercyclical measures in the form of capital buffers and
forward looking provisioning, developing a framework for systemically important entities
including cross-border resolution arrangements, extending the regulatory perimeter to
unregulated pools of money, de-risking the OTC derivatives trading through central
counterparties and new framework for regulating employee compensation within the financial
sector. The impact assessment of the new proposals made by the BCBS will be completed
this year and a consensus on fully calibrated measures is expected to be evolved by the end
of the year.
The Indian scenario
6. India's financial system, like most emerging market economies, was not seriously
affected by the financial turmoil in the developed economies mainly because of the relatively
lower integration of the domestic financial sector with the global financial system and limited
exposure of overseas branches of the Indian banks to the synthetic and complex structured
products. The adverse effects on the economy were mainly due to sudden reversal of capital
flows, tightening of credit availability from the overseas and domestic markets impacting
respectively the domestic forex market and liquidity conditions. This resulted in increased
pressure on banks to provide credit at a time when their financial resources were already
quite strained pursuant to the rapid credit expansion in the previous three years. In the
circumstances, the thrust of the various policy initiatives by the Reserve Bank has been on
providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining a
market environment conducive for the continued flow of credit to productive sectors.
7. What saved the day for the Indian financial system was our policy approach of
gradual and calibrated integration of the domestic financial system with overseas markets,
especially the debt markets - through capital controls - as also well-modulated regulatory
policies to contain bank exposure to sensitive sectors, which are more prone to asset
bubbles, such as real estate and capital markets. Further, ensuring that banks maintained
adequate capital and liquidity while containing undue volatility in the forex and debt markets
helped in preserving financial stability, while promoting growth. In understanding the Indian
perspective on banking regulation, it would be useful to look at the regulatory framework prior
to the crisis and the measures initiated to strengthen it in the wake of the crisis.
Regulatory framework - prior to the crisis
8. In devising the regulatory framework for banks, RBI has always kept in focus the
financial stability objective. A number of counter-cyclical regulatory measures that are now
attracting attention world-wide, were already in place in India even before the onset of the
crisis
Capital requirements
9. The minimum capital adequacy ratio (CRAR) for banks in India at nine per cent is
higher than the Basel norm of eight per cent. Banks are also required to ensure minimum
Tier I capital ratio of six per cent from April 1, 2010. The current average CRAR for the
scheduled commercial banks is over 13 per cent while Tier I ratio is about nine per cent.
Importantly, Tier I capital does not include items such as intangible assets and deferred tax
assets that are now sought to be deducted internationally.
Liquidity buffers
10. Indian banks have a significant holding of liquid assets as they are required to
maintain cash reserve ratio - CRR, currently 5.75 per cent - and statutory liquidity ratio -
SLR, currently 25 per cent - both, as a proportion to their "net" liabilities. Central bank
liquidity support for managing day-to-day liquidity needs of the banks is available only
against SLR securities held over and above the statutory minimum of 25 per cent. Thus, the
excess SLR maintained is always available as a source of liquidity buffer. Besides, the
Reserve Bank can also lower the SLR requirement in a distress scenario, to make liquidity
available to the banks against their resulting excess SLR. Measures are also in place to
mitigate liquidity risks at the very short end, at the systemic level by limiting
interconnectedness, especially in the uncollateralised money market, and at the institutional level.
More than a decade ago the RBI had issued asset-liability management (ALM) guidelines to
banks, covering liquidity risk measurement, reporting framework and prudential limits. Banks
are required to monitor their cumulative mismatches across all time buckets and establish
internal prudential limits with the approval of the Board. The ALM guidelines were updated in
Oct 2007, inter alia, making the liquidity risk management more granular.
Management of concentration risk
11. Recognising that risk concentrations could be a very important cause for problems
in banks, RBI advised banks in India way back in 1989 to fix internal, Board-approved limits
on their exposures to specific industries or sectors and also prescribed prudential regulatory
limits on banks' exposure to single and group borrowers.
12. There are prudential limits on single and group borrower exposures as per which
banks are allowed as on date, to lend up to 15 per cent of capital funds to a single borrower
and up to 40 per cent of capital funds to a borrower group. This can be increased by an
additional 5 per cent and 10 per cent, respectively for lending to infrastructure. In addition,
banks have been allowed to consider enhancements in exposures to a borrower (single as
well as group), in exceptional circumstances, up to a further 5 per cent of capital funds, with
the approval of their Boards. In 2003, prudential limits on single and group borrower
exposures and capital market exposures were extended to the consolidated level also for the
entire banking group.
Capital Market Exposure (CME)
13. With a view to insulating banks from exposure to asset-price volatility, prudential
norms were prescribed for their exposure to capital market, acquired through both, funded
and non-funded facilities. The exposure ceiling was initially set at five per cent of the total
outstanding advances of a bank as on 31st March of the previous year. However, with effect
from April 2007, the aggregate exposure of a bank to capital markets has been restricted to
40 per cent its net worth. Within this overall ceiling, a bank's direct investment in shares,
convertible bonds/debentures, units of equity-oriented mutual funds and all exposures to
Venture Capital Funds should not exceed 20 per cent of its net worth. Similarly, the
aggregate exposure of a consolidated bank to capital market and its direct investment in
capital markets have been capped at 40 per cent and 20 per cent of the consolidated net
worth respectively.
Real estate exposure
14. Banks are expected to monitor their exposure to commercial real estate (which
has been defined in detail) so as to limit the risk of any downturn in this sector. Although
no regulatory limit is specified in this regard, RBI keeps a close watch on each bank's
exposure to the CRE sector through off-site surveillance and initiates corrective actions
as necessary.
Investment portfolio
15. In the year 2000, the RBI conducted a stress test of the banks' investment portfolio
in an increasing interest rate scenario, when the general trend then was of decreasing
interest rates. At that time, banks in India were maintaining a surrogate capital charge for
market risk, which was at a variance from the Basel norms. On the basis of the findings, in
order to equip the banking system to be better positioned to meet the adverse impact of
interest rate risk, banks were advised in January 2002 to build up an Investment Fluctuation
Reserve (IFR) within a period of five years. The prudential target for the IFR was five per
cent of their investments in "Held for Trading" (HFT) and "Available for Sale" (AFS)
categories. Banks were encouraged to build up a higher percentage of IFR up to 10 per cent
of their AFS and HFT investments. This counter-cyclical prudential requirement enabled
banks to absorb some of the adverse impact when interest rates began moving in the
opposite direction in late 2004. In stages, IFR was gradually phased out by October 2005
with the outstanding holdings therein being treated as Tier 1 capital. Banks have been
maintaining capital charge for market risk as envisaged under the Basel norms since
endMarch 2006.
16. With the change in the direction of the movement of interest rates in 2004, the cap
on the "Held to Maturity" (HTM) category (at 25 per cent of the total investments) was
reviewed in light of the statutory prescriptions requiring banks to mandatorily invest up to
25 per cent of their Demand and Time Liabilities (DTL) in eligible government securities. In
view of the statutory pre-emption and the long duration of the government securities, banks
were permitted to exceed the limit of 25 per cent of total investments under HTM category
provided the excess comprised only the SLR securities and the total SLR securities held in
the HTM category was not more than 25 per cent of their DTL. One-time shifting of securities
to HTM category was allowed at acquisition cost or book value or market value on the date of
transfer, whichever was the least, and the depreciation, if any, on such transfer was required
to be fully provided for. These changes recognised the dynamic interface of the banks'
investment portfolio with the interest rate cycles and were counter-cyclical.
Accounting policies - unrealised gains and gains on securitised deals
17. Recognising the merit of a conservative approach to valuation of investments by
banks, the extant prescription requires banks to recognise the losses (depreciation) but
ignore the appreciation (gains). Banks are required to mark to market the each scrip in the
HFT and AFS categories at prescribed periodicity, following the principle of scrip-wise
valuation and category-wise aggregation. Investments in a particular classification (as per the
classifications required for balance sheet purposes), may be aggregated for arriving at net
depreciation/appreciation of investments under that category. While net depreciation, if any,
needs to be provided for, net appreciation, if any, has to be ignored. Also, the net
depreciation required to be provided for in any one classification cannot be reduced on
account of net appreciation in any other classification. There is thus an in-built cushion in
banks' balance sheet in the form of unrealised gains in the value of the financial instruments.
18. The RBI's guidelines on securitisation do not allow upfront booking of profit by the
originator in securitisation of standard assets, but stipulate that any profit/premium or
loss/discount arising on account of asset sale should be amortised over the life of the
securities issued or to be issued by the SPV, and reflected in the Profit & Loss account. This
measure ensured that profit booking was not the prime mover of securitization transactions
of banks.
Measure of leverage
19. Absolute and incremental credit aggregates (including credit deposit ratio) are
amongst the host of variables, forming an integral part of macro-economic and prudential
policy formulation. In the Indian context an incremental credit-deposit ratio of more than
100 per cent, when the system itself has a high overall absolute credit deposit ratio (say
beyond 70 per cent) is taken as a sign of overheating. A prudential focus on credit deposit
ratio also encourages the banks to raise deposits for funding credit flow and minimizes the
use of purchased funds. As the requirement for SLR is to hold unencumbered securities,
banks cannot leverage the minimum SLR portfolio to take on more assets. Thus, the focus
on credit deposit ratio and the SLR prescription have both served to limit the degree of
leverage in the Indian banking system. The level of leverage is also regulated in India for the
non-banking financial entities. The Development Financial Institutions (DFIs), which are also
regulated by the RBI, are required to comply with a leverage ratio defined in terms of the
multiples of their net owned funds. The non-deposit taking systemically important
nonbanking financial companies, even though they do not accept public deposits, are also
subject to a capital adequacy regime. This was done since these companies were found to
be raising public funds from banks and capital market to grow their balance sheets.
Investment in non-government securities
20. Prudential management of investment in non-Government securities (non-SLR
securities) by the banks has been another area of regulatory focus primarily with a view to
enhancing transparency of their investment portfolio. The need for such management was
first articulated in the Mid-term Review of Monetary and Credit Policy for the year 2001-02
and detailed guidelines to banks followed in November 2003 to address the risks arising out
of investment in non-SLR securities. The prudential measures included confining the
shortterm (less than one-year) investments of banks, only to CPs and CDs, insistence on credit
rating for all such non-SLR investments, limiting the investment in unlisted non-government
securities at 10 per cent of the overall non-SLR investment portfolio and comprehensive
disclosure requirements.
Securitisation
21.
The RBI issued guidelines on securitisation of standard assets in February 2006.
These guidelines, as alluded to earlier, prohibit originators from booking profits upfront at the
time of securitisation. Two other features relate to maintenance of capital at the required
minimum of 9% on any credit enhancements provided, and disallowing the release of credit
enhancement during the life of the credit-enhanced transaction. Thus, banks in India did not
have incentive to resort to unbridled securitisation as observed in "originate-to-distribute" and
"acquire and arbitrage" models of securitisation in many other countries. It is our perception
that these guidelines have served the system well and going forward the intention is to
further strengthen these by stipulating minimum lock-in period of one year for originators and
a minimum retention of 10 per cent of the pool of assets being securitised.
Derivatives
22. In December 2002, the banks' exposure to derivatives was brought under the capital
adequacy regime by prescribing credit conversion factors linked to the maturities of interest
rate contracts and exchange rate contracts. Accordingly, since April 1, 2003 banks were
advised to adopt, either original exposure method based on original maturity or current
exposure method based on residual maturity, consistently for all derivative products, in
determining individual/group borrower exposure. After the banks gained sufficient expertise
in the area, the option of original exposure method was withdrawn and since August 2008
banks are required to compute their credit exposures, arising from the interest rate and
foreign exchange derivative transactions using the current exposure method. The conversion
factors were increased and doubled for certain residual maturities with a view to improve the
capital cushion available for such derivative products.
23. The amendments to Reserve Bank of India Act, 1934 in 2006 conferred on the RBI
explicit powers to regulate the derivative products which have the exchange rate, interest
rate or credit rating as the underlying. Comprehensive guidelines on derivatives were issued
in April 2007. The guidelines, intended to safeguard the interests of the system as well as the
players in the market, lay down eligibility criteria, broad principles for undertaking derivative
transactions, permissible derivative instruments, risk management and corporate governance
aspects as also aspects relating to both suitability and appropriateness of a derivative
product for a client.
Collateralised money market
24. A number of structural measures were initiated by the RBI to restrict
noncollateralised borrowing and lending in the money markets. In 2002, limits were placed on
call money borrowing and lending. Simultaneously, measures were taken to develop the
market repos and the Collateralised Borrowing and Lending Obligations (CBLO) markets with
the Clearing Corporation of India Ltd acting as a central counter party. By August 2005, the
non-bank players were phased out of the uncollateralised call money markets, which is now
a pure inter-bank market. The share of the (collateralized) market repo and CBLO segments
in the total money market is significant at nearly 90% in recent months.
Limit on inter-bank exposures
25. Recognising the possible impact of excessive interconnectedness within the banking
system, in March 2007, RBI limited a bank's inter-bank liabilities (IBL) to twice its net worth.
A higher IBL limit up to 300 per cent of the net worth was allowed for banks whose CRAR
was at least 25 per cent more than the minimum CRAR (nine per cent) i.e., 11.25 per cent.
Corporate governance
26. Reckoning the importance of having diversified ownership of banks to ensure that
there is no dominance by any shareholder or group of shareholders, directly or indirectly, as
also to ensure that significant owners of banks are "fit and proper", RBI issued
comprehensive guidelines of ownership and governance in 2003 as also "fit and proper"
requirements for directors. Under the extant guidelines, any transfer of a bank's shares
amounting to five per cent or more of its total paid up equity capital is required to be
approved by RBI before the bank can register the transfer. For holdings beyond 10 per cent
prior approval is required. Large industrial houses cannot have ownership of a bank beyond
10 per cent.
27. The RBI has taken various steps to improve corporate governance standards in
banks. The private sector banks are required to set up Nomination Committees to oversee
"fit and proper" status of board of directors through appropriate due diligence and obtain
periodical deed of covenants from the directors. To facilitate induction of fresh minds and
ideas, an upper age limit has been prescribed for non-executive directors in private sector
banks. Further, the post of the Chairman and Managing Director in private sector banks has
been split into a part time Chairman, who would provide strategic vision for the banks and a
Managing Director, who, as the Chief Executive, would be responsible for the day-to-day
management of the bank.
Compensation of CEOs
28. The Reserve Bank has been mandated by statute to regulate executive
compensation in private sector banks. It is the statutory responsibility of RBI to ensure that
the remunerations of bank CEOs and whole time directors are not excessive. In terms of
Section 35 B of the Banking Regulation Act, 1949, the banks in the private sector and foreign
banks in India are required to obtain the approval of the Reserve Bank for remuneration
payable to their CEOs while the remuneration of public sector bank CEOs is fixed by the
Government of India.
29. The RBI ensures that executive compensation, whether it is in the form of cash or
stock, is appropriate, taking into account the financial position of the concerned bank and
also the industry practice. The RBI has instructed the boards of the private sector banks to fix
remuneration package of CEOs at a reasonable level in light of industry practice in India.
Further, the annual bonuses of CEOs of private sector banks are capped at a certain
percentage of their base salary. The Remuneration Committees of banks, consisting of
independent directors, are made responsible for implementation of compensation structure in
banks.
Restrictions on external debt intermediation by banks and FIs
30. As a measure of capital account management, banking system's access to
overseas markets has been regulated. Some liberalisation was allowed in 2004, when banks
in India were permitted to raise overseas funds not exceeding 25 per cent of their unimpaired
Tier I capital or equivalent of USD 10 million, whichever was higher. With a view to providing
greater flexibility to Authorised Dealer Category - I banks in seeking access to overseas
funds, this facility was further liberalised in October 2008 and the aforesaid limit was raised
to 50 per cent of their unimpaired Tier I capital. Apart from this window, banks in India also
have access to global financial markets to raise regulatory capital instruments, including
capital funds raised/augmented by the issue of innovative perpetual debt instruments and
debt capital instruments in foreign currency and any other overseas borrowings with the
specific approval of the Reserve Bank. Similarly, there are restrictions on the borrowing
abroad by financial institutions. These measures have ensured that overseas lenders take
risk on companies directly and do not leverage on the comfort of intermediation by a bank or
a financial intermediary.
Market infrastructure
31. An institutional mechanism initiated by RBI for minimising settlement risk was the
setting up the Clearing Corporation of India Ltd (CCIL) in 2001 as a central counter party. It
provides an institutional structure for the clearing and settlement of transactions undertaken
in Government securities, money market instruments and foreign exchange products. In
October 2007, CCIL has become a member of the CCP 12, an international organisation of
the central counterparty clearing organisations. Apart from this, there are also systems in
place for reporting trades in corporate bonds for ensuring greater transparency.
Supervision of financial conglomerates
32. In order to address the limitations of the segmental approach to supervision of
bigger financial groups, the Reserve Bank of India, in consultation with the Securities and
Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority
(IRDA), put in place in June 2004 a special monitoring framework for Financial
Conglomerates (FCs). Under the framework, certain key/critical information/data are being
collected from identified FCs by their respective principal regulators. The data/information,
among others, relate to intra-group transactions and exposures of the identified groups. The
review of the intra-group transactions is conducted with a view to track build-up of large
exposures to entities within the Group, to ensure that the transactions are conducted in an
arm's-length relationship, to identify cases of migration/ transfer of "losses" and detect
situations of regulatory/supervisory arbitrage. The build-up of exposures of the Group on a
collective basis to outside counterparties and to various financial market segments (equity,
debt, money market, derivatives market etc.) are also assessed in course of the analysis of
data. The monitoring mechanism, thus, seeks to capture the "contagion risk" within the group
as also its cumulative exposure to specific outside entities, sectors and market segments,
from the point of view of various concentration risks facing the Group.
Regulation of NBFCs
33. The systemic significance of non-banking financial institutions and hence, the need
for their regulation, which is now engaging the attention of policy makers globally, had been
recognised by India more than a decade ago when in the RBI Act was amended to bring the
non-banking financial institutions within the regulatory domain of the Reserve Bank.
34. The initial policy stance was focused on the objective of depositor protection and all
regulations were formulated to address this objective. Accordingly, Non-deposit taking
NBFCs (NBFCs-ND) were subject to minimal regulation. However, recognising the systemic
significance of certain entities, RBI classified, in December 2006, non-deposit taking NBFCs
having asset size of Rs 100 crore and more as systemically important. To strengthen the
capital base of such companies and reduce the possibility of excessive leverage, capital
adequacy requirements were introduced besides the credit concentration norms. A capital
adequacy ratio of 10 per cent, which is higher than that for banks, was prescribed for
NBFCs-ND-SI with effect from April 01, 2007.
35. Apart from capital adequacy norms, single and group credit/investment
concentration norms were also introduced with effect from April 01, 2007 for NBFCs-ND-SI in
as much as they could not lend to or invest in shares of any single entity exceeding 15 per
cent of their owned fund; and to any single group of borrowers exceeding 25 per cent of their
owned fund; or lend and invest (loans/investments taken together) more than 25 per cent of
owned fund to a single party; and 40 per cent of owned fund to a single group of parties.
Countercyclical prudential measures
36. From 2004 through 2007, in conjunction with monetary policy, the RBI used
preemptive countercyclical provisioning and differential risk weights to contain excessive credit
growth to sectors that showed signs of risk building up. These include sectors where asset
prices were increasing rapidly (such as real estate and capital markets) and retail or personal
loan sectors where underwriting standards, were perceived to have been diluted during the
phase of very high credit growth. For instance, in 2004, a higher risk weight of 125 per cent
(earlier 100 per cent) was prescribed for consumer credit, including personal loans and credit
cards receivables. Similarly, in July 2005, the continued rapid expansion in credit to the
capital market and commercial real estate sector prompted the Reserve Bank to increase the
risk weights on banks' exposure to these sectors to 125 per cent. About a year later in May
2006, the risk weight on commercial real estate exposure was further increased from 125 per
cent to 150 per cent. In January 2007, the risk weight for bank's exposure to NBFC-ND-SI
was increased from 100 per cent to 125 per cent. The higher risk weight applicable to these
sectors were found to be an effective tool for moderating credit growth, besides serving the
prudential purpose. Anticipating the deterioration in credit quality that is expected in the
context of high credit growth, the general provisioning requirement on standard advances in
viz.,
certain sensitive sectors, capital market exposure, residential housing loans beyond
Rs.20 lakh, commercial real estate loans and loans/advances to NBFCs-NDSI was raised
from 0.4 per cent to one per cent in May 2006, and subsequently to two per cent in January
2007.
37. These prescriptions were reviewed in the context of the global financial crisis in
November 2008. The risk weights to the sensitive sectors were restored to 100 per cent from
the higher levels. The provisioning requirements for all types of standard assets was reduced
to a uniform level of 0.40 per cent except in the case of direct advances to agricultural and
SME sectors, which continued to attract a provisioning of 0.25 per cent, as hitherto. As the
economy stabilised, it was found that credit to CRE again started showing signs of rapid
growth while there was evidence of lack of demand in the sector; the provisioning
requirement for CRE was increased to one per cent in October 2009 to deal with the likely
rise in NPAs. Thus, RBI deviated from the Greenspan Orthodoxy, and used prudential
measures to safeguard the banking system from any fallout of asset price bubbles and busts.
Development of institutional framework for ensuring financial stability
38. Apart from being the banking regulator, the RBI has responsibility for regulating
nonbanking financial companies - both deposit taking and non-deposit taking. In addition it
regulates the forex, money and government bond markets. It can also impose or remove
capital controls under the Foreign Exchange Management Act. Further, the RBI is the
regulatory authority for the payments and settlements system under the relevant Act passed
in 2007. These powers have made it possible for the RBI to be a key systemic regulator for
ensuring financial stability. The institutional framework developed to achieve this objective
included the Board for Financial Supervision (BFS), which was e