Board for Financial Supervision
Also written BFS · Board for Financial Supervision (BFS)
The committee of RBI's Central Board, constituted in 1994, that directs RBI's consolidated supervision of commercial banks, financial institutions and NBFCs.
In plain language
RBI wears two hats. It is the monetary authority that sets policy for the whole economy, and it is the regulator and supervisor of the banks and other lenders that operate in it.
The second job is supervised from within RBI's own board. In 1994 RBI constituted the Board for Financial Supervision (BFS) as a committee of its Central Board of Directors. Its primary objective is consolidated supervision of the financial sector — commercial banks, financial institutions and non-banking finance companies.
The BFS does not inspect banks itself. It oversees the departments that do, issues directions on regulatory and supervisory issues, and drives the changes in how supervision is done.
How it works
What it oversees. The Department of Banking Supervision, the Department of Non-Banking Supervision and the Financial Institutions Division.
Initiatives the workbook credits to the BFS:
- Fine-tuning RBI's supervisory processes for regulated entities.
- An off-site surveillance system to complement on-site supervision.
- Strengthening the statutory audit of banks and enlarging the role of auditors in supervision.
- Strengthening internal defences — corporate governance, internal control and audit, MIS and risk control, housekeeping.
- A supervisory rating system for banks and financial institutions.
- Supervision of overseas operations of Indian banks; consolidated supervision of banks.
- A technical assistance programme for cooperative banks.
- The Prompt Corrective Action Framework for weak banks.
- Guidance on a fraud risk management framework in banks.
- Risk-based supervision of banks.
- An enforcement framework for banks.
- A credit registry of large borrowers of supervised institutions.
- A subsidiary of RBI for IT requirements, including cyber security, of RBI and its regulated entities.
Context in RBI. RBI's functions are governed by the Reserve Bank of India Act, 1934; the banking sector by the Banking Regulation Act, 1949. RBI's general superintendence is entrusted to a Central Board of Directors appointed by the Government of India, with four Local Boards advising on regional issues.
A worked example
Illustrative figures. An NBFC with a Rs 6,500 crore loan book, funded partly by Rs 2,000 crore of listed NCDs, is showing strain.
How RBI supervision, under the BFS, sees it.
| Tool from the BFS's list | What it catches |
|---|---|
| Off-site surveillance returns | Gross stressed loans rising from 3% to 9% of the book — Rs 585 crore — over four quarters |
| On-site inspection by the Department of Non-Banking Supervision | Loans rolled over to avoid classification |
| Statutory audit strengthened | Auditor asked to report on the roll-overs |
| Credit registry of large borrowers | Its three largest borrowers are also stressed at two banks |
| Fraud risk management guidance | Two of the roll-overs routed through a related party |
Stressed loans = 9% × Rs 6,500 crore = Rs 585 crore
The consolidated view is the point: the same borrowers turn up in the NBFC's book and in banks' books, which a department looking at one institution at a time would miss.
The listed NCDs bring SEBI in on the market side. The lending, the capital and the supervision are RBI's — directed through the BFS.
Why NISM asks about it
Chapter 2.2.2 (Role of Reserve Bank of India) introduces the BFS inside RBI's supervisory function. Expect 1994, committee of the Central Board, the three entity types under consolidated supervision (commercial banks, FIs, NBFCs), and the three units it oversees. The list of initiatives lends itself to which of these is not a BFS initiative questions.
Common exam traps
- Constituted in 1994 as a committee of RBI's Central Board of Directors — not a separate statutory regulator, and not part of SEBI or the Ministry of Finance.
- Consolidated supervision covers commercial banks, financial institutions and NBFCs — all three.
- It oversees the Department of Banking Supervision, the Department of Non-Banking Supervision and the Financial Institutions Division.
- Off-site surveillance complements on-site supervision; it does not replace it.
- The Prompt Corrective Action Framework is for weak banks.
- RBI Act, 1934 governs RBI; Banking Regulation Act, 1949 governs the banking sector. Do not swap them.
Where this is taught
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series XVII · Chapter 9: Regulations & Regulatorsintroduced here
- Series III-C · Chapter 2: Regulatory Framework - General Viewintroduced here
Related terms
- Capital marketThe market in which companies and governments raise long-term funds — for periods longer than a year — through shares and bonds, together with the secondary market where those securities later trade.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- Ministry of Corporate AffairsThe Government of India ministry that administers the Companies Act and the Competition Act, supervises ICAI, ICSI and the Institute of Cost Accountants, and has the ROCs and the SFIO under it.
- FIU-INDIndia's central national agency for receiving, processing, analysing and disseminating information on suspect financial transactions, set up in November 2004 and reporting to the Economic Intelligence Council.