Adoption of Core Principles and Uniform Accounting Standards. The Core Principles for Effective Banking Supervision (1997) evolved by the Basle Committee on Banking Supervision (BCBS) have been accepted for adoption by the RBI. The Core Principles seek to promote and enhance the standards of supervision. Incidentally, I may add that the International Accounting Standards Committee (IASC) is also working closely with the BCBS on reducing differences in supervisory approaches to loan valuation and credit loss provisioning. In many areas of banking supervision and securities regulation, international consensus has been reached and principles or standards have been established. In other areas there still is a need to define best practices and develop standards. The lack of international consensus on sound practices for loan valuation, loan-loss provisioning and credit risk disclosure seriously impairs the ability of market analysts as well as regulators to understand and assess the risk inherent in a financial institution's activities.

The far-reaching supervisory initiatives on the part of the RBI has now brought all Indian development finance institutions and non banking financial companies under an intensive supervisory framework through both on-site inspection and off-site monitoring procedures.

The RBI set up an exclusive Supervisory Division in August 1990 for monitoring the operations of select all Indian development financial institutions (FIs). Currently, 12 such FIs are being monitored. Of them, the term lending and refinance institutions, viz. Industrial Development Bank of India (IDBI), Industrial Credit & Investment Corporation of India Ltd. (ICICI), Industrial Finance Corporation of India Ltd. (IFCI), Industrial Investment Bank of India Ltd. (IIBI), EXIM Bank, Tourism Finance Corporation of India Ltd. (TFCI), National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI) are also subject to the on-site supervision process of the RBI.

Prudential norms relating to income recognition, asset classification, provisioning and capital adequacy have also been prescribed, for IDBI, ICICI, IIBI and EXIM Bank in March 1994 and for SIDBI , NABARD and NHB in March 1996.

The RBI has been regulating the NBFCs, which numbered around 40000 companies, for over 3 decades since 1963. The regulatory role up to 1997 was confined to deposit acceptance activities of NBFCs and did not cover the asset quality and liquidity mismatch aspects. In the context of the increasing functional diversity and expanding intermediation role of this sector, the RBI, through enabling legislation to its regulatory powers, has taken a series of steps for compulsory registration and liquidation of recalcitrant and defaulting companies in repayment of public deposits. An entry norm of minimum net owned funds of Rs.25 lakhs was prescribed for the purpose of registration. A registration process to cover as many as 7689 companies was initiated in July 1997 and was completed by December 1998. Simultaneously, prudential guidelines have been put in place to govern the various aspects of their functioning besides bringing them under more intensive onsite supervision based on the CAMELS pattern. More detailed presentation on some of the innovative supervisory practices and extensive use of technology for data compilation and analysis is slated to follow during the last session of this Meeting.

As you would have observed from the foregoing, the Indian supervisory system has already made much headway in realigning itself to the emerging needs, particularly addressing the risks inherent in the liberalisation and globalisation of the Indian economy after the advent of financial sector reforms. The prudential norms adopted by Indian banks in the area of marking the investments to market conform to the international standards. The disclosure norms already prescribed for Indian banks as part of accounting standards do conform to the global best practices besides ensuring transparency in published accounts. The only area where the BIS standards are yet to be implemented in full are those relating to asset classification, particularly in respect of re-defining NPAs as those past due for a quarter (instead of 2 quarters as at present) and the reduction in the period for classifying such accounts as doubtful from 24 months to 12 months. We are however making earnest efforts in this direction to make our banking system more transparent and vibrant.

The banking system had acquired, at the time of introduction of prudential norms for the first time in 1992-93, a large quantum of non-performing credit which can be termed as legacy NPAs.

It is worth mentioning that the incremental NPAs in subsequent years have been at much lower levels. The level of NPAs in the Indian banking sector is being commented upon as an alarming one by various international and domestic analysts/groups. At the same time, these agencies have rather chosen to ignore the high level of NPAs which have totally eroded the banking systems in the East Asian countries, with many banking institutions folding up as a consequence. In this background, it has to be mentioned that the NPAs of the Indian banking system have already been provided for more than 50 per cent, which is often ignored by the international agencies when evaluating the NPA status of the Indian system. Further, Indian banks secure their loans to a very large extent by collateral. The banks in India do not normally prefer to write off loans covered by collateral during the pendency of cases in law courts. Looking into the delays in realisation of collateral, it is of paramount need to focus our attention on expediting legal reforms recommended by the Committee on Banking Sector Reforms (Narasimham Committee II). The banks also have to activate the procedures of compromise settlements and their recovery machinery towards faster recovery.

Another factor which contributed to the build-up of NPAs in the past was the lack of focussed attention on the end use of funds by the borrowers. The borrowers in many instances went for projects and purposes other than those included or prioritised in the original schemes sanctioned by the banks. To avoid such a situation, the banks have already started paying a lot of attention to the end use of credit. The RBI expects the banks to set up an efficient and appropriate loan review mechanism for this purpose.