Powers to RBI to decide on capital requirements on a case by case basis needs to be clearly defined in law.
A stricter review of the proposed arrangements and standards for internal control as well as the management’s philosophy and business objectives at the pre-licensing stage of banks will greatly mitigate possible hazards during the operational stages.
RBI should apply stricter norms for the ‘fit and proper’ test while evaluating directors and the quality of the board.
While fixing the definition of "substantial interest" at a higher level, it would be desirable to require banks to obtain the prior approval of the supervisor for any proposed changes in ownership or exercise of voting rights over the ‘threshold’.
Forbearance in taking measures against banks that fail to meet minimum capital adequacy ratios cannot be long term and specific measures against such banks need to be stipulated in the interest of the overall soundness of the system.
RBI should also gradually move towards setting bank specific capital ratios based on their individual risk profiles.
RBI may assist and guide banks in their efforts to stabilise advanced risk management systems. Larger and more capable banks may be encouraged to complete the process early so that they can act as leaders and models for the smaller and not so well equipped banks.
A system for classification of off-balance sheet items on the lines of the extant system of classification of funded exposures should be put in place and a note to that effect provided in banks’ financial statements.
RBI may consider issuing suitable detailed instructions requiring banks to have mechanisms in place for continually assessing the strength of guarantees and appraising the worth of collateral.
"Closely related groups" need to be explicitly defined and the supervisor should have the discretion, prescribed in law, in interpreting the definition on a case by case basis.
RBI may consider issuing instructions to the effect that loans to connected and related parties which are not fully collateralised may be deducted from banks’ capital to the extent that they are not collateralised.
Banks should be instructed to monitor the total amount of loans to connected and related parties and introduce an independent credit administration process. Limits on aggregate exposures to connected and related parties by a bank need to be established.
Advanced risk management capabilities must be in place in all banks latest by the end of the financial year 2002-2003. RBI may assist banks in hastening introduction of the more scientific and sophisticated risk management systems.
Banks should be required to include a statement on their risk management policies and procedures in their publicly available documents.
A more formal and rigorous assessment of the boards’ performance must be undertaken by the regulator. The regulator should adopt rating of the boards’ performance with the provision that, if the rating falls below a certain specified level, prompt corrective action should be triggered.
In the context of globalisation and ever increasing domestic and cross-border flows of funds, the implementation of "Know Your Customer" guidelines should be verified by the supervisor and adherence thereto made more stringent.
RBI should consider moving over to a risk-based approach to supervision as early as possible.
Quality of management needs to be given greater weightage in supervisory assessments.
RBI may consider introducing meetings with banks’ boards and external auditors in the interest of greater involvement of the board with supervisory concerns and actions in order to enrich the scope of examination of banks.
RBI may consider using independent and well qualified external auditors to examine specific aspects of banks’ operations.
The move towards consolidated accounting and supervision needs to be expedited. Steps need to be taken so that necessary legal provisions are introduced and banks are required to prepare consolidated accounts.
RBI may impress upon the government the need and urgency of achieving and maintaining a high level of coordination among different regulators.
The public sector character of banks remains an important consideration in the supervisor deciding upon and initiating sanctions and/or penalties on banks. RBI should consider introduction of measures by which clear accountability can be fixed on individual directors and/or the board of directors for non-performance and/or negligence of their duties.
The range of possible actions available to RBI should include imposition of conservatorship which can enable a bank in difficulty to gain some time until it completes remedial measures.
A suitable legal provision obliging the statutory auditors of banks to report on matters of material significance to the regulators will strengthen the supervisory regime.
RBI should practice consolidated supervision over internationally active banking organisations of which it is the home country supervisor. RBI should endeavour to get into formal relationship with host country supervisors on the basis of MoUs.
