Eight commercial banks will shortly come under the purview of the Reserve Bank of India's risk-based supervision as part of a larger roadmap to move the banking system towards the New Basle Capital Accord.
Based on the experience gained, the central bank intends including non-banking finance companies, urban co-operative banks and other intermediaries in the financial sector in the RBS exercise down the line.
To begin with the central bank will call for data pertaining to the first quarter of the current financial year from the eight banks even as their supervision and rating under the CAMELS (capital, asset quality, management, earnings, liquidity and systems) mode will continue.
The eight banks - public, private and foreign - have been chosen as part of RBI's pilot run on implementing the risk-based supervision for banks.
The rationale for implementing RBS against the extant transaction-based supervision is to enable the RBI to assess the standing of banks with regard to 12 parameters - capital, credit risk, market risk, earnings, liquidity risk, business strategy & environment risk, operational risk, group risk, internal control, organisation risk, management risk and compliance risk, a senior RBI official said at a Indian Banks Association - Crisil seminar on "Risk Management in banks in the changing environment."
"Given the fact that supervisory resources are scarce, it is imperative to move from the broad-based onsite supervisory approach to the more specific discriminatory approach. This will allow our resources to be focussed on problem banks. Further the risk profiling will enable us to make informed regulatory decisions," said the official.
The need for RBS, among others, stems from deregulation of interest rates; functional autonomy conferred on banks; liberalised financial sector; technology innovation. The aim is to ensure that banks comply with regulations; their operations do not pose systemic risk and are conducive to the financial sector; and they maintain a high standard of service.
In this context, supervisory tools require that there be greater offsite surveillance and targeted onsite inspections; structured meetings with banks; external audits; give specific supervisory directions; and new policy notices (new policy level direction to banks emanating from individual bank level concerns).
Once the whole banking system is moved to the RBS, the official said that penal provisions will be incorporated to punish banks not submitting elaborate data on the 12 parameters.