RBI Prioritizing Forward-Looking Supervision

In a speech delivered at the High-level Policy Conference of Central Banks from the Global South last week, Swaminathan J, a Deputy Governor at the Reserve Bank of India (RBI), argued that supervision must evolve in order to keep pace with the emerging risks facing the financial sector, emphasizing the importance of a forward-looking, data-informed approach.

"As the world rapidly evolves, so does the nature of risks confronting the financial sector," Swaminathan said, referencing technological advancements, cyber threats, climate change, and geopolitical tensions. “Thus, the task of supervision has become more dynamic and critical than ever before.”

"Supervision, therefore, needs to evolve with the times and can no longer be just about enforcing compliance," he emphasized. "Instead, it needs to anticipate risks, respond swiftly to both foreseeable and unforeseen risks and foster resilience in the financial system." Resilience is not only measured in a financial system's ability to withstand shocks, Swaminathan argued, but also its ability to adapt to new circumstances and thrive.

"To build financial resilience, supervision must be proactive, continuous, forward-looking, and risk focused," he said. Supervisors must be able to identify, evaluate, and address within supervised institutions and across the financial system, Swaminathan stressed. They must also deploy a well-defined framework for early intervention and a clear contingency plan to resolve non-viable banks.

These objectives have guided the RBI's efforts to improve its own supervisory capabilities. "We have designed and implemented a Calibrated Supervisory Approach, which provides the flexibility and scalability needed to focus more effectively on high-risk institutions and practices," Swaminathan said. “At the heart of this approach is a proactive off-site surveillance mechanism that enables us to detect emerging risks and assess vulnerabilities across the supervised entities, ensuring timely action to mitigate or manage these risks before they escalate.”

Looking forward, the RBI is working toward the development of a robust data analytics ecosystem to support its supervisory activities. This is essential as the RBI looks to ensure its "approach remains forward-looking and agile in a rapidly changing world," Swaminathan concluded.