The Reserve Bank had issued a number of instructions to the banks to tackle the problem of recovery of bad debts. While pursuing the compromise settlements arrived at Lok Adalats more effectively, the banks were also advised to constitute Settlement Advisory Committees (SACs) for compromise settlements of chronic cases of NPAs under small sector. With a view to have a more realistic approach to reduce the stock of NPAs in all categories, revised guidelines were issued in July 2000 which provide a simplified, non-discretionary and non-discriminatory mechanism for recovery of the NPAs. We need hardly to emphasise that banks should take utmost advantage of these guidelines so that maximum realisation of dues is achieved within the stipulated time; i.e., March 2001.

Government of India has recently made necessary amendments to DRT Act with a view to empower the DRTs for expeditious recovery of dues. Steps have been initiated to constitute 7 additional DRTs; four in Mumbai and one each in Calcutta, Chennai and New Delhi, taking the total number of DRTs to 21. Further, the proposed introduction of Bankruptcy and Foreclosure laws, setting up of Credit Information Bureau, etc. would strengthen the institutional framework for dealing with impaired assets.

The pace of innovation of new products, intense competition, rapid technological developments in the banking system and integration of financial markets has underscored the need for a strong and efficient supervisory system. The focus and methodology of the Annual Financial Inspections of the banks conducted by the RBI have undergone change in order to give emphasis to the analysis of the systems prevailing in the bank for taking care of various risks in the banking business. The inspection is conducted in a more objective manner under the CAMELS model and a comprehensive rating system has been put in place. The banks have been advised about the procedure followed in the rating exercise in the interest of transparency and to help them in their effort to improve the rating in the subsequent period. The system, which is in place for last three years, is being reviewed in order to make it more objective and transparent.

As announced by the Governor in the Monetary and Credit policy for the year 2000-2001, the RBI is now in the process of moving towards Risk Based Supervision which would incorporate international best practices for supervision suitably customised for the Indian environment. In the changed scenario of diversified banking business and emerging product innovations with complex risk profiles, the Risk Based Supervision approach will more efficiently allocate supervisory resources by monitoring the risk profile of the supervised institution to supplement the traditional transaction based approach. However, for the Risk Based approach to work, the banks must also put in place the desired level of risk management systems as have been envisaged in our guidelines on the subject.

As a further step towards more effective banking supervision, a system of Prompt Corrective Action is being contemplated which will help to identify problem banks at an early stage for taking mandated and discretionary preventive/curative action and limiting the losses and contagion effect. Some important financial indicators such as CRAR, net NPA and Return on Assets are to serve as signalling parameters for the purpose.

One of the most important challenges facing banking in India currently is the need for effective utilisation of technology in the various facets of banking aimed at not only for improving customer efficiency but also for improving management information systems, better house-keeping including and empirical decision making. Technology has also brought in a sea change in payment and settlement systems which has resulted in the Reserve Bank initiating many measures aimed at reforms in this area. The immediate need in the current scenario is for computerisation of branches of banks and the attendant standardisation of hardware, operating systems and networking platforms to synchronise computerisation with the ultimate goal of development of sound generic architecture model for interconnectivity between branches, the controlling offices and the Head Office, using the Indian Financial Network (INFINET) implemented by the Institute for Development and Research in Banking Technology (IDRBT). The culmination of such efforts would be that almost all branches of banks in the commercially important centres would be inter-connected and be able to transmit messages between themselves in the respective cities as also amongst other bank branches.

Many new payment and settlement products are at various stages of implementation by the Reserve Bank of India. The Centralised Funds Management System (CFMS), the Securities Settlement System (SSS), the Real Time Gross Settlement System (RTGS) and the Structured Financial Messaging System (SFMS) are some of the major projects which would be of high utilitarian value for banks. It is imperative that if banks have to actively participate in all these systems, they should be in a position to either develop their internal applications to generate messages in these formats or provide for interfaces which would facilitate generation of the messages from the existing applications in the banks. Once Real Time Gross Settlement (RTGS) is in place, the system would take care of the requirements of large value settlements on a gross basis. This would have the impact of cutting down the time lag for collection / credit of funds to the accounts of beneficiaries and increase the velocity of money and cut costs.

Corporate Governance has as its backbone a set of transparent relationship between an institution's management, its Board, shareholders and other stakeholders. It should therefore take into account a number of aspects such as enhancement of shareholder's value, protection of rights of shareholders, composition and role of Board of Directors, integrity of accounting practices and disclosure norms and internal control system. As far as the banking industry is concerned, corporate governance relates to the manner in which the business and affairs of individual banks are directed and managed by their Board of Directors and Senior management. It also provides the structure through which objectives of the institution are set, the strategy of attaining those objectives is determined and the performance of the institution is monitored.

The paper of the BCBS on the subject envisages certain strategies and techniques basic to sound corporate governance in banks. Basic elements of corporate governance are capable and experienced Directors in the Board, efficient Management, coherent strategy and business plan and clear lines of responsibility and accountability. While the primary responsibility for good corporate governance in banks rests with the Board of Directors, the roles played by the Government, regulator, auditors and banking industry associations are equally important.

The standards of accounting and valuation methods adopted by the banks in India are comparable to a great extent to the international standards. The extent of transparency and disclosure standards of balance sheets of banks has been substantially enhanced in a phased manner. Banks have been advised to disclose maturity pattern of deposits, borrowings, investments, advances and foreign currency assets and liabilities, movement in NPAs and lending to sensitive sectors with effect from March 31, 2001. The existing disclosure standards do not fully provide for necessary feedback for the market participants to evaluate the efficiency, competitive strength, market standing of banks, etc. These need to be further enhanced to incorporate risk management policies, concentrations, connected lendings, evaluation of investment in subsidiaries, performance measures and indicators thereof, etc.

The VRS scheme which was introduced by several Public Sector Banks has received a good response. In the immediate future, banks have to ensure that their normal functioning is not disrupted and they complete the consequential part of reallocation and redeployment without delay. This will be accentuated by the fact that banks are going to lose a number of experienced and skilled personnel. Appropriate Human Resources Management Policy with a focus on extensive training is required to be adopted by the banks in order to carry on the business more efficiently. Banks should also endeavour to reduce the existing tiers of decision-making and empower personnel at the functional levels adequately for increasing efficiency and competing with foreign and new generation private sector banks.

An organisational restructuring including branch rationalisation and business rationalisation needs to be undertaken to make banking services product and customer friendly. In this context, I would like to stress that banks need to recognise the concept of change management. Banks must concentrate on 'team building' and reorient their staff to align with the evolving market and customer driven financial system.

As I have brought out earlier, one key ingredient of the post-liberalization agenda of banking supervision in India has been to propagate compliance with a regime of prudential regulations based on international best practices. While banks have responded well to the regulatory requirements, they now need to go beyond externally imposed supervision to internally adopted supervision by putting in place standards and Internal controls which are more stringent than those prescribed by the RBI. Prudential regulation should be seen as minimum requirements and banks should set internal benchmarks which are over and above those mandated by supervisors. I would like to call this approach as 'supervision-plus'. This is not a new approach. The well managed international banks already follow this whether it is for allocating capital or setting exposure norms or deciding adequate level of provisions.

The balance sheet of corporates are mirrored in the balance sheets of the banking system and their financial condition affects that of the banking system. Excessive leverage in the corporate (and even the public) sector, especially due to borrowings from the financial system, can contribute to fragility in the economy. In order to guard against such situation developing, banks should set individual and group exposure norms which are below the 20 per cent and 50 per cent set by the RBI. The banks should collect data on the debt equity ratio of borrowing entities, particularly the large borrowers and groups for effective prevention of these borrowers turning into highly leveraged institutions posing a systemic threat to the financial system.

What is more critical than mere definition issues in the arena of asset quality is the extent to which banks have provided for their NPAs over and above the minimum stipulated requirements. As a thumb rule, it will be desirable for banks to endeavour to build up loan loss provisions to a level of 50 per cent of total NPL's in the near future.

We have recently introduced circulation of lists between banks and Financial Institutions of willful defaulters. Banks must learn the art of distinguishing genuine defaults from willful defaults. While a different approach could be considered in respect of former category, the banks should come down heavily on willful defaults and consider instituting criminal cases against some of the large willful defaulters to provide a demonstrative impact on the rest of the recalcitrant borrowers.

The Indian Banking system has stood the tests of time and it has the inherent strength to adopt itself to the changing environment. What is needed is the proper direction coupled with motivation. The leadership must instill confidence in the ranks and they will then find their tasks much easier.