Personal Website of R.Kannan
Indian Banking Today and Tomorrow - Supervision
of the Indian Financial System by
Reserve Bank of India

1. Banks

   In terms of the new approach adopted for the on-site inspection of banks, the Inspecting Officers concentrate on core assessments based on the CAMELS model (Capital adequacy, Asset quality, Management, Earnings appraisal, Liquidity and Systems & controls). This approach eschews aspects which do not have a direct bearing on the evaluation of the bank as a whole or which should essentially concern the internal management of the bank. The new approach to Annual Financial Inspections was put in practice from the cycle of inspections commencing in July 1997.

   A rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems and control elements was introduced for the inspection cycle commencing from July 1998. The review of the supervisory rating system has been completed so as to make it more consistent as a measure of evaluation of bank's standing and performance as per on-site review. The improved rating framework is expected to come into effect from the on-site inspection cycle commencing from April 2001.

   A model to rate the level of customer service in banks was developed and forwarded to Indian Banks' Association for conducting appropriate surveys on customer satisfaction at periodical intervals. During the course of annual financial inspections 'customer audit' is carried out to evaluate quality of customer service at branches of commercial banks

   A Quarterly Monitoring System through on-site visits to the newly licensed banks in their first year of operation has been put in place. Old and new private banks displaying systemic weaknesses are also subjected to quarterly monitoring.

   In deference to the desire of the banks (as put forth during an informal feedback session with the Governor in October 1999) to have an opportunity to meet the supervisor at regular intervals for discussing compliance related issues and agreeing on regulatory and supervisory requirements in respect of new business initiatives, a quarterly informal meeting system for banks with the officials of Department of Banking Supervision has been designed and put in operation from January 2000.

   Some of the public sector banks have also been placed under special monitoring, with a Senior Officer in the jurisdictional Regional Office of the Bank entrusted with the special monitoring efforts. The Deputy Governor / Executive Director in-charge of banking supervision call the CEOs of those banks, wherein serious deficiencies have been reported in the inspection reports, for a discussion on the specific steps the bank's top management would need to take to improve its financial strength and operational soundness.

   A new Inspection Manual has been brought out in 1998 taking into account evolving supervisory needs and shift in approach towards risk based supervision. Another new manual for the use of inspectors looking at ALM and Treasury operations was prepared with the help of international consultants under the Technical Assistance Project funded by Department for International Development (DFID), UK and has been put to use by the RBI inspectors.

   Detailed guidelines on risk control systems in computerised banks have been circulated amongst banks along with the details of electronic records to be maintained for supervisory access. Specialised training modules along with extensive guidelines for use of RBI Inspectors are in place for inspection of computerised bank systems. An international consultancy firm, funded by the DFID (UK), helped the Bank in its aforesaid project.

   In order to address the issue of causes of divergence observed with regard to asset classification etc., provisioning required to be made between the banks/auditors and RBI Inspectors, a representative group of banks, a chartered accountant and RBI officials was constituted in March 2000 to review and arrive at uniform parameters of assessment of NPAs by banks/auditors and RBI Inspectors. Guidelines are being issued to the banks and the Inspecting Officers based on the recommendations of the Group.

2. Supervision of overseas branches of Indian banks

   While inspection of the overseas operations of branches of Indian banks is left largely to the parent banks, a system of evaluation visits covering all branches functioning at different financial centres has been instituted as a part of the initiatives taken to strengthen cross border supervision. Besides periodical visits and meetings with overseas supervisors, formal MOUs for exchange of supervisory information are being worked out as part of the process of implementation of Basel Committee's core principles on cross border supervisory cooperation.

   Portfolio appraisals of the International Divisions of Indian banks having foreign branches are also conducted by the Department of Banking Supervision annually. In these appraisal exercises conducted at the bank's corporate offices and controlling divisions of foreign operations, asset quality, operating results, etc. of the foreign branches and the host country regulators' perceptions are also assessed and periodically discussed with the banks' International Divisions for rectification of the functional gaps.

3. Financial Institutions

   All India financial institutions are being covered by on-site supervisory process (CAMELS standards) on the lines in vogue for banks since 1995. Taking into account the developmental functions and supervisory function exercised by some of these institutions - NABARD supervises state/central cooperative banks and regional rural banks, National Housing Bank (NHB) regulates and inspects housing finance companies, and IDBI inspects state financial corporations - a modified approach for supervisory assessment of these institutions has been introduced. A Working Group under the chairmanship of Shri Y.H.Malegam, a Member of the BFS, has come out with guidelines that will become operative shortly.

4. Non-Banking Financial Companies

   The system of on-site examination is structured on the basis of CAMELS approach and the same is akin to the supervisory model adopted for the banking system. A comprehensive Inspection Manual has been brought out for the use of Inspecting Officers. Appropriate supervisory framework, wherever necessary with the assistance of external chartered accountant firms, has been evolved for on-site inspection of all NBFCs holding public deposits.