Urgent attention would need to be paid to develop suitable mechanisms in order to detect and provide for situations of double gearing and other similar problems related to supervision of financial conglomerates. (Paragraph 7.1.5)
RBI should ensure that fitness, propriety or other qualification tests are applied to managers and directors of the unregulated entities in a conglomerate if they exercise a material or controlling influence on the operations of the regulated entities. (Paragraph 7.1.6)
Considering the potential of risk contained in such a situation, it would be desirable to put in place arrangements for applying fit and proper tests also on all shareholders with shareholdings beyond a specified threshold. Suitable legal provisions would need to be introduced in the Banking Regulation Act empowering RBI clearly in this regard. (Paragraph 7.1.7)
Fitness, propriety or other qualification tests need to be applied on a continuous basis so that occurrence of any event which raises any doubt about fitness and propriety of a manager, director or a shareholder (with shareholding beyond a specified level), results in the test being applied. (Paragraph 7.1.8)
Arrangements should be formalised for exchange of information between all regulators involved in regulation of different entities in a conglomerate. (Paragraph 7.1.9)
RBI may consider introducing the concept of primary supervisor in order to improve coordination between different supervisors (regulators) and add to the scope and quality of the overall supervision of the conglomerate. (Paragraph 7.1.10)
RBI may urgently consider the desirability of introducing and participating in a scheme of formalised coordination between different regulators and designation of one of the regulators involved as a coordinator with clearly assigned roles and responsibilities. (Paragraph 7.1.12)
RBI should consider issuing appropriate guidelines requiring banks to ensure that they and their subsidiaries and joint ventures have adequate risk management processes covering group-wide risk concentrations as well. (Paragraph 7.2.2)
To ensure that financial conglomerates have controls in place to manage their risk concentrations, RBI may issue instructions to banks to ensure that their up-stream and down-stream units introduce appropriate controls to manage their risk concentrations. (Paragraph 7.2.2)
Comprehensive management information and reporting system at the conglomerate level would have to be insisted upon by RBI to build a sound risk management approach. (Paragraph 7.2.4)
Public disclosure of risk concentrations may be made mandatory. (Paragraph 7.2.5)
Any such information which helps the market or the supervisors to arrive at meaningful inferences in regard to financial condition, solvency, earnings performance and risk profile, should be provided on solo as well as a consolidated basis. (Paragraph 7.2.6)
Where more than one supervisor is involved, they should be able to take coordinated supervisory action, particularly in the area of risk management by the different entities of a conglomerate. The range and scope of information exchange among sectoral supervisors should be made broader and multi-point. (Paragraph 7.2.7)
RBI may consider including material risk concentrations at the conglomerate level as one of the possible triggers for the prompt corrective action framework. (Paragraph 7.2.8)
In the interest of effective consolidated supervision and for ensuring due transparency in the dealings between the units of a conglomerate, public disclosure of Intra-group Transactions and Exposures (ITEs) should be made compulsory. Suitable regulations as well as accounting principles would need to be put in place to ensure such disclosure. (Paragraph 7.3.2)
Risk management systems that are being put in place in banks need to take into account the special risks posed by ITEs. Supervisors should liaise closely with one another to ascertain each other's concerns and coordinate as deemed appropriate. (Paragraphs 7.3.3 and 7.4.1).
