Supervision of the Indian Financial System

(Commercial banks, Non banking financial companies, and All India financial institutions) !!" # $%%% &eserve 'ank of India (epartment of 'anking Supervision Central )ffice *umbai (ecember $%%% 1. Introduction 2. Organisation of the Supervision Function 3. Supervisory Process 4. On-site Supervision 5. Off-site Supervision 6. oard for Financia! Supervision ". #estructuring the Syste$ of Supervision %. &orporate 'overnance and (anage$ent 'uidance ). *ransparency and +isc!osure 1,. Interna! &ontro!s and -ouse.eeping in an.s 11. &ore Princip!es for /ffective an.ing Supervision 12. Future 0genda + Introduction Internationa!!y1 fo!!o2ing the fai!ure of so$e !arge 3an.s and 3an. re!ated entities1 there has 3een a de3ate on the segregation of supervision fro$ traditiona! centra! 3an.ing1 citing the conf!ict 3et2een $onetary po!icy o34ectives and 3an. supervision o34ectives. 0t the sa$e ti$e1 there is a!so a considered vie2 that 3an. supervision function can provide the centra! 3an. 2ith far $ore infor$ation fro$ and contro! over the institutions and $ar.ets and thus assist in $aintaining financia! sta3i!ity. *he financia! $ar.ets have 3eco$e $ore sophisticated and g!o3a! in nature1 adding to the cha!!enges faced 3y centra! 3an.s 2hi!e at the sa$e ti$e rapid strides in te!eco$$unication and e!ectronic data processing coup!ed 2ith ne2 funding instru$ents1 gro2th of securitisation1 e$ergence of ne2 institutions have increased the ro!e and responsi3i!ities of 3an. supervisors. *he !ega! and institutiona! fra$e2or. for 3an. supervision in India is provided under the an.ing #egu!ation 0ct1 1)4). 5nti! 1))41 different depart$ents in #eserve an. of India 2ere e6ercising supervision over 3an.s1 non-3an.ing financia! co$panies and financia! institutions. *o .eep a c!ose 2atch on financia! $ar.ets and avoid recurrence of crisis in the financia! syste$1 the oard for Financia! Supervision 2as set up under the aegis #eserve an. under #eserve an. of India 7 oard for Financia! Supervision8 #egu!ations1 1))4 2ith the o34ective of paying undivided attention to the supervision of the institutions in the financia! sector.

$+ )rganisation of the Supervision Function Prior to 1))31 the supervision and regu!ation of co$$ercia! 3an.s 2as hand!ed 3y the +epart$ent of an.ing Operations 9 +eve!op$ent 7+ O+8. In +ece$3er 1))3 the +epart$ent of Supervision 2as carved out of the + O+ 2ith the o34ective of segregating the supervisory ro!e fro$ the regu!atory functions of # I. '!o3a!!y1 increasing financia! dis-inter$ediation has !ed to an increase in the assets and reach of non-3an. finance co$panies necessitating enhanced regu!atory attention to2ards these non-3an. and near-3an. entities. *he $erger of Financia! Institutions &e!! 2ith the +epart$ent of Supervision in :une 1))" !ed to the for$ation of an e6c!usive Financia! Institutions +ivision 2ithin the +oS 2hich 2as entrusted 2ith 3oth supervision and regu!ation over a!! India deve!op$ent financia! institutions. ;ater1 the +epart$ent of Supervision 2as sp!it into +epart$ent of an.ing Supervision 7+ S8 and +epart$ent of <on- an.ing Supervision 7+< S8 on :u!y 2)1 1))" 2ith the !atter 3eing entrusted 2ith the tas. of focussed regu!atory and supervisory attention to2ards the < F& seg$ent. (epartment of 'anking Supervision (('S) *he +epart$ent of an.ing Supervision at present e6ercises the supervisory ro!e re!ating to co$$ercia! 3an.s in the fo!!o2ing for$s= a8 Preparing of independent inspection progra$$es for different institutions. 38 5nderta.ing schedu!ed and specia! on-site inspections1 off-site survei!!ance1 ensuring fo!!o2up and co$p!iance. c8 +eter$ining the criteria for the appoint$ent of statutory auditors and specia! auditors and assessing audit perfor$ance and disc!osure standards. d8 +ea!ing 2ith financia! sector frauds. e8 /6ercising supervisory intervention in the i$p!e$entation of regu!ations 2hich inc!udes > reco$$endation for re$ova! of $anageria! and other persons1 suspension of 3usiness1 a$a!ga$ation1 $erger?2inding up1 issuance of directives and i$position of pena!ties. (epartment of Non#'anking Supervision((N'S) +epart$ent of <on- an.ing Supervision has fo!!o2ing responsi3i!ities= a8 0d$inistration of &hapter III of the # I 0ct1 for$u!ating regu!atory fra$e2or. and issuing directions to the < F&s 7inc!uding residuary non-3an.ing co$panies1 $utua! 3enefit co$panies1 chit fund co$panies8@

38 0d$inistration of &hapter III-& of the # I 0ct in respect of unincorporated 3odies1 &hit Funds 0ct in respect of chit fund co$panies1 PriAe &hits and (oneys &ircu!ation Sche$es 7 anning8 0ct in respect of priAe chits@ c8 d8 e8 f8 g8 h8 Identification and c!assification of < F&s@ #egistration of < F&s under section 45-I0 of the # I 0ct@ On-site inspection and fo!!o2 up@ Off-site survei!!ance and scrutiny of various returns@ 0ttending to co$p!aints re!ating to < F& sector@ and Initiating deterrent action against the errant co$panies.

&onsidering the $anifo!d gro2th of < F&s 1 a ne2 regu!atory fra$e2or. 2as put in p!ace in :anuary 1))% to ensure that on!y financia!!y sound and 2e!! run < F&s are a!!o2ed to access pu3!ic deposits. 0fter interaction 2ith the industry representatives and considering the reco$$endations of the *as. Force on < F&s set up 3y the 'overn$ent1 these regu!ations 2ere $odified in +ece$3er 1))%. *he regu!ations and guide!ines governing < F&s are a!so $ade avai!a3!e periodica!!y on the # I 2e3sites as part of pu3!ic do$ain infor$ation. *he e6perience of supervision in the intervening period has1 ho2ever1 !ed to the recognition of the fact that e6isting !egis!ative fra$e2or. reBuires further refine$ent 3ecause of the rising nu$3er of defau!ting < F&s and the a3sence of a Buic. redressa! syste$ for individua! depositors. 'overn$ent of India appointed a *as. Force to go into the adeBuacy of the !egis!ation1 2hich has $ade 2ide ranging reco$$endations. ased on these1 a draft CFinancia! &o$panies #egu!ationC i!! has 3een prepared 2hich 2i!! address the !acunae in procedures and statute.

,+ Supervisory -rocess *he $a4or instru$ent of supervision of the financia! sector is inspection. *he inspection process focuses $ain!y on aspects crucia! to the 3an.Ds financia! soundness 2ith a recent shift in focus to2ards ris. $anage$ent. 0reas re!ating to interna! contro!1 credit $anage$ent1 overseas 3ranch operations1 profita3i!ity1 co$p!iance 2ith prudentia! regu!ations1 deve!op$enta! aspects1 proper va!uation of asset? !ia3i!ity portfo!io invest$ent portfo!io1 and the 3an.Ds ro!e in socia! !ending are covered in the course of the inspection. *he +epart$ent underta.es statutory inspections of 3an.s on the 3asis of an annua! progra$$e1 2hich is co-ter$inus 2ith the financia! year for pu3!ic sector 3an.s. 0fter the inspection report is re!eased to the 3an.1 fo!!o2ed 3y a Esupervisory !etterD 3ased on the inspection findings to the 3an.1 the concerns of the inspections are discussed 2ith the &/O of the 3an. and a (onitora3!e 0ction P!an is given to the 3an. for

rectification of those deficiencies. *he +epart$ent su3$its a $e$orandu$ covering supervisory concerns 3rought out 3y the inspection to the oard for Financia! Supervision 7 FS8. Specific corrective directions of the FS are conveyed to the 3an.s concerned for i$$ediate co$p!iance. *he (e$oranda su3$itted 3y the depart$ents for supervisory scrutiny and consideration of FS genera!!y cover $atters re!ating to supervisory strategy and operationa! supervision of individua! 3an.s1 financia! institutions and non-3an.ing financia! co$panies as a!so industry-2ide issues and sectora! perfor$ance revie2s. &!oser supervision on the asset Bua!ity and fi6ing responsi3i!ity on the 3oard and accounta3i!ity on top $anage$ent of 3an.s has had a percepti3!e i$pact on the <on Perfor$ing 0ssets 7<P0s8 of pu3!ic sector 3an.s. *he 3an.s have sho2n a dec!ining trend in ter$s of percentage of <P0s to tota! advances during the !ast four years. *he percentage of gross <P0s to gross advances of pu3!ic sector 3an.s dec!ined fro$ a high !eve! of 1).45 at the end of (arch 1))5 to 13.%6 as on 31 (arch 2,,,. *he net <P0s for$ed %.,"F of the net advances as on 31st (arch 2,,,. *he &apita! to #is.-2eighted 0ssets #atio 7&#0#8 for 3an.s initia!!y fi6ed at %F 2as increased to )F fro$ (arch 2,,,. *he position of 3an.s not achieving the prescri3ed &#0# !eve! since 1))5 has co$e do2n fro$ 42 3an.s 714 pu3!ic sector8 as on 31 (arch 1))5 to 4 3an.s 71 pu3!ic sector8 as on 31 (arch 2,,, due to constant $onitoring and directions for i$prove$ent in this area at Buarter!y interva!s. .+ )n#site inspection (i) 'anks In ter$s of the ne2 approach adopted for the on-site inspection of 3an.s1 the Inspecting Officers concentrate on core assess$ents 3ased on the &0(/;S $ode! 7 Capita! adeBuacy1 Asset Bua!ity1 *anage$ent1 /arnings appraisa!1 0iBuidity and Syste$s 9 contro!s8. *his approach esche2s aspects 2hich do not have a direct 3earing on the eva!uation of the 3an. as a 2ho!e or 2hich shou!d essentia!!y concern the interna! $anage$ent of the 3an.. *he ne2 approach to 0nnua! Financia! Inspections 2as put in practice fro$ the cyc!e of inspections co$$encing in :u!y 1))". 0 rating syste$ for do$estic and foreign 3an.s 3ased on the internationa! &0(/;S $ode! co$3ining financia! $anage$ent and syste$s and contro! e!e$ents 2as introduced for the inspection cyc!e co$$encing fro$ :u!y 1))%. *he revie2 of the supervisory rating syste$ has 3een co$p!eted so as to $a.e it $ore consistent as a $easure of eva!uation of 3an.Ds standing and perfor$ance as per on-site revie2. *he i$proved rating fra$e2or. is e6pected to co$e into effect fro$ the on-site inspection cyc!e co$$encing fro$ 0pri! 2,,1. 0 $ode! to rate the !eve! of custo$er service in 3an.s 2as deve!oped and for2arded to Indian an.sD 0ssociation for conducting appropriate surveys on custo$er satisfaction at periodica! interva!s. +uring the course of annua! financia! inspections Ecusto$er auditD is carried out to eva!uate Bua!ity of custo$er service at 3ranches of co$$ercia! 3an.s 0 Guarter!y (onitoring Syste$ through on-site visits to the ne2!y !icensed 3an.s in their first

year of operation has 3een put in p!ace. O!d and ne2 private 3an.s disp!aying syste$ic 2ea.nesses are a!so su34ected to Buarter!y $onitoring. In deference to the desire of the 3an.s 7as put forth during an infor$a! feed3ac. session 2ith the 'overnor in Octo3er 1)))8 to have an opportunity to $eet the supervisor at regu!ar interva!s for discussing co$p!iance re!ated issues and agreeing on regu!atory and supervisory reBuire$ents in respect of ne2 3usiness initiatives1 a Buarter!y infor$a! $eeting syste$ for 3an.s 2ith the officia!s of +epart$ent of an.ing Supervision has 3een designed and put in operation fro$ :anuary 2,,,. So$e of the pu3!ic sector 3an.s have a!so 3een p!aced under specia! $onitoring1 2ith a Senior Officer in the 4urisdictiona! #egiona! Office of the an. entrusted 2ith the specia! $onitoring efforts. *he +eputy 'overnor ? /6ecutive +irector in-charge of 3an.ing supervision ca!! the &/Os of those 3an.s1 2herein serious deficiencies have 3een reported in the inspection reports1 for a discussion on the specific steps the 3an.Ds top $anage$ent 2ou!d need to ta.e to i$prove its financia! strength and operationa! soundness. 0 ne2 Inspection (anua! has 3een 3rought out in 1))% ta.ing into account evo!ving supervisory needs and shift in approach to2ards ris. 3ased supervision. 0nother ne2 $anua! for the use of inspectors !oo.ing at 0;( and *reasury operations 2as prepared 2ith the he!p of internationa! consu!tants under the *echnica! 0ssistance Pro4ect funded 3y +epart$ent for Internationa! +eve!op$ent 7+FI+81 5H and has 3een put to use 3y the # I inspectors. +etai!ed guide!ines on ris. contro! syste$s in co$puterised 3an.s have 3een circu!ated a$ongst 3an.s a!ong 2ith the detai!s of e!ectronic records to 3e $aintained for supervisory access. Specia!ised training $odu!es a!ong 2ith e6tensive guide!ines for use of # I Inspectors are in p!ace for inspection of co$puterised 3an. syste$s. 0n internationa! consu!tancy fir$1 funded 3y the +FI+ 75H81 he!ped the an. in its aforesaid pro4ect. In order to address the issue of causes of divergence o3served 2ith regard to asset c!assification etc.1 provisioning reBuired to 3e $ade 3et2een the 3an.s?auditors and # I Inspectors1 a representative group of 3an.s1 a chartered accountant and # I officia!s 2as constituted in (arch 2,,, to revie2 and arrive at unifor$ para$eters of assess$ent of <P0s 3y 3an.s?auditors and # I Inspectors. 'uide!ines are 3eing issued to the 3an.s and the Inspecting Officers 3ased on the reco$$endations of the 'roup. (ii) Supervision of overseas branches of Indian banks Ihi!e inspection of the overseas operations of 3ranches of Indian 3an.s is !eft !arge!y to the parent 3an.s1 a syste$ of eva!uation visits covering a!! 3ranches functioning at different financia! centres has 3een instituted as a part of the initiatives ta.en to strengthen cross 3order supervision. esides periodica! visits and $eetings 2ith overseas supervisors1 for$a! (O5s for e6change of supervisory infor$ation are 3eing 2or.ed out as part of the process of i$p!e$entation of ase! &o$$itteeDs core princip!es on cross 3order supervisory cooperation. Portfo!io appraisa!s of the Internationa! +ivisions of Indian 3an.s having foreign 3ranches are

a!so conducted 3y the +epart$ent of an.ing Supervision annua!!y. In these appraisa! e6ercises conducted at the 3an.Ds corporate offices and contro!!ing divisions of foreign operations1 asset Bua!ity1 operating resu!ts1 etc. of the foreign 3ranches and the host country regu!atorsD perceptions are a!so assessed and periodica!!y discussed 2ith the 3an.sD Internationa! +ivisions for rectification of the functiona! gaps. (iii) Financial Institutions 0!! India financia! institutions are 3eing covered 3y on-site supervisory process 7&0(/;S standards8 on the !ines in vogue for 3an.s since 1))5. *a.ing into account the deve!op$enta! functions and supervisory function e6ercised 3y so$e of these institutions > <0 0#+ supervises state?centra! cooperative 3an.s and regiona! rura! 3an.s1 <ationa! -ousing an. 7<- 8 regu!ates and inspects housing finance co$panies1 and I+ I inspects state financia! corporations > a $odified approach for supervisory assess$ent of these institutions has 3een introduced. 0 Ior.ing 'roup under the chair$anship of Shri J.-.(a!ega$1 a (e$3er of the FS1 has co$e out 2ith guide!ines that 2i!! 3eco$e operative short!y. (iv) Non#'anking Financial Companies *he syste$ of on-site e6a$ination is structured on the 3asis of &0(/;S approach and the sa$e is a.in to the supervisory $ode! adopted for the 3an.ing syste$. 0 co$prehensive Inspection (anua! has 3een 3rought out for the use of Inspecting Officers. 0ppropriate supervisory fra$e2or.1 2herever necessary 2ith the assistance of e6terna! chartered accountant fir$s1 has 3een evo!ved for on-site inspection of a!! < F&s ho!ding pu3!ic deposits. "+ )ff#site *onitoring 1 Surveillance System (i) 'anks 0s a part of the ne2 supervisory strategy1 an off-site $onitoring syste$ for survei!!ance over 3an.s 2as put in p!ace in # I in (arch 1))6. *he first tranche of OS(OS returns reBuire Buarter!y reporting on assets1 !ia3i!ities and off 3a!ance-sheet e6posures1 &#0#1 operating resu!ts for the Buarter1 asset Bua!ity and !arge credit e6posures in respect of do$estic operations 3y a!! 3an.s in India. +ata on connected and re!ated !ending and profi!e of o2nership1 contro! and $anage$ent are a!so o3tained in respect of Indian 3an.s. an. profi!es containing 3an.-2ide data3ase on a!! i$portant aspects of 3an. functioning inc!uding g!o3a! operations 2ere o3tained for the years co$$encing fro$ 1))4 and are 3eing updated annua!!y on an on-going 3asis. *he data3ase provides infor$ation on $anageria! and staff productivity areas 3esides furnishing i$portant ratios on certain financia! gro2th and supervisory aspects of the 3an.Ds functioning. 0na!ysis of financia! and $anageria! aspects under the reporting syste$ is done on Buarter!y 3asis in a co$puterised environ$ent in respect of 3an.s and revie2s are p!aced 3efore FS for its perusa! and further directions. *he second tranche of returns covering !iBuidity and interest rate ris. e6posures 2ere introduced in :une 1))). *o acco$$odate the increased data and

ana!ysis reBuired 3y the second tranche of returns1 a pro4ect to upgrade the OS(OS data3ase has 3een co$p!eted and the ne2 processing syste$ has 3een put in p!ace for the #eturns co$$encing fro$ the Buarter ended Septe$3er 2,,,. *rend ana!ysis reports 3ased on certain i$portant $acro !eve! gro2th?perfor$ance indicators are p!aced 3efore FS at periodica! interva!s. So$e of the i$portant reports generated 3y the +epart$ent inc!ude ha!f-year!y revie2 of the perfor$ance of 3an.s1 ha!f-year!y .ey 3an.ing statistics1 ana!ysis of i$paired credits1 ana!ysis of !arge credits1 ana!ysis of ca!! $oney 3orro2ings1 ana!ysis of non S;# invest$ents1 etc. *he an. a!so provides detai!s of peer group perfor$ance under various para$eters of gro2th and operations for the 3an.s of a co$parative 3usiness siAe to $otivate the$ to do se!f assess$ent and strive for e6ce!!ence. *he Indian 3an.s conducting overseas operations report the assets and !ia3i!ities1 pro3!e$ credits1 $aturity $is$atches1 !arge e6posures1 currency position on Buarter!y 3asis and country e6posure1 operating resu!ts etc. on an annua! 3asis. *he reporting syste$ has 3een revie2ed and rationa!ised in 1))) in consu!tation 2ith the 3an.s and the revised syste$ put in p!ace in :une 2,,,. *he revised off-site returns focus on infor$ation re!ating to Bua!ity and perfor$ance of overseas invest$ent and credit portfo!io1 i$p!e$entation of ris. $anage$ent processes1 earning trends1 and via3i!ity of the 3ranches. (ii) All India (evelopment Financial Institutions Guarter!y returns have 3een designed 3ased on data on the !ia3i!ities and assets as 2e!! as data on sources and dep!oy$ent of funds. (iii) Non#'anking Financial Companies Off-site survei!!ance of < F&s invo!ves scrutiny of various statutory returns 7Buarter!y?ha!f year!y?annua!81 3a!ance sheets1 profit and !oss account1 auditorsD reports1 etc. 0 for$at for conducting the off-site survei!!ance of the co$panies 2ith asset siAe of #s.1,, crore and a3ove has a!so 3een devised. 2+ 'oard for Financial Supervision3 Constitution *he &o$$ittee on Financia! Syste$ set up 3y the 'overn$ent of India had suggested that the supervisory functions of # I shou!d 3e separated fro$ the $ore traditiona! centra! 3an.ing functions and that a separate agency1 2hich cou!d pay undivided attention to supervision1 shou!d 3e set up under the aegis of # I. 0 co$p!ete severance of supervision fro$ centra! 3an.ing 2as not considered necessary or desira3!e in the Indian conte6t. So1 3ased on this reco$$endation , the first oard for Financia! Supervision 7 FS8 2as constituted on <ove$3er 161 1))4 3y the 'overnor as a co$$ittee of the &entra! oard of +irectors of the #eserve an. of India 7# I8. It functions under the # I 7 FS8 #egu!ations1 1))4 e6c!usive!y fra$ed for the purpose in consu!tation 2ith the 'overn$ent of India. *he oard is chaired 3y the 'overnor and is constituted 3y co-opting four non-officia! +irectors fro$ the &entra! oard as (e$3ers for a

ter$ of t2o years. *he +eputy 'overnors of the an. are e6-officio (e$3ers. One of the +eputy 'overnors is no$inated as Kice-&hair$an. *he +epart$ent of an.ing Supervision serves as the Secretariat for the FS. Shri S P *a!2ar1 +eputy 'overnor ho!ding charge of the an.Cs regu!ation and supervision function has 3een the Kice-&hair$an of the FS since its inception. +r. J. Kenugopa! #eddy and Shri :agdish &apoor1 +eputy 'overnors1 are other e6-officio (e$3ers as on date. Shri J (a!ega$1 Shri / 0 #eddy1 +r. S S :oh!1 and +r. 7(s8 0$rita Pate!1 2ho 2ere $e$3ers on the &entra! oard of +irectors of the #eserve an.1 2ere the non-officia! $e$3ers of the first oard. *he oard has since 3een reconstituted for a ter$ of t2o years in consu!tation 2ith the &entra! oard in its $eeting he!d on 21 +ece$3er 2,,,1 2ith +r. 0sho. S. 'angu!y and Shri H. (adhava #ao no$inated in the p!ace of +r. S. S. :oh! and Shri /. 0. #eddy1 2ho ceased to 3e $e$3ers of the reconstituted &entra! oard. Shri J - (a!ega$ and +r. 7(s8 0$rita Pate! have 3een no$inated to continue as (e$3ers of the reconstituted FS. /6ecutive +irectors in-charge of +epart$ent of an.ing Operations 9 +eve!op$ent1 +epart$ent of an.ing Supervision and +epart$ent of <on- an.ing Supervision participate in the FS $eetings 3y invitation. Incharges of these depart$ents are a!so to 3e in attendance for the $eetings. *he &hair$an1 Kice-&hair$an and (e$3ers of the oard 4oint!y and severa!!y e6ercise the po2ers of the oard. *he oard is at present reBuired to $eet ordinari!y at !east once a $onth. *hree (e$3ers1 of 2ho$ one sha!! 3e &hair$an or the Kice-&hair$an1 for$ the Buoru$ for the $eeting. Advisory Council to 'FS For tendering advice to the FS in its initia! years on po!icy $atters re!ating to the supervision of the financia! syste$ an 0dvisory &ounci! 2as constituted on <ove$3er 161 1))4 and 2as in p!ace ti!! (arch 2"1 1))%. *he &ounci! consisting of five $e$3ers1 e$inent in the fie!ds of !a21 accountancy1 3an.ing1 finance and $anage$ent $et nor$a!!y once a Buarter during the period of its tenure. Sub Committee (Audit) to 'FS *he FS a!so constituted an 0udit Su3-&o$$ittee in :anuary 1))5 2ith the Kice &hair$an of FS as &hair$an of the su3-&o$$ittee and t2o non-officia! $e$3ers of FS as other (e$3ers. #epresentatives of the Institute of &hartered 0ccountants are a!so invited to the $eetings of the Su3 &o$$ittee depending on the nature of the agenda. *he Su3 &o$$itteeDs $ain focus is on up-gradation of the Bua!ity of the statutory audit and concurrent audit ? interna! audit functions in 3an.s1 < F&s and financia! institutions1 fi6ing of re$uneration1 approva! of the pane! of statutory auditors and 3ranch auditors as a!so the accounting and disc!osure standards. Supervisory 4urisdiction *he supervision 3y FS at present covers co$$ercia! 3an.s1 a!! India deve!op$ent financia! institutions and non-3an.ing finance co$panies.

In its very first $eeting1 the FS approved a ne2 strategy of supervision1 the .ey e!e$ents of 2hich inc!ude= Setting up an off-site survei!!ance function1 the $a4or co$ponents of 2hich inc!ude esta3!ishing a syste$ for in-house $onitoring of 3an.s and other credit institutions1 3ased on a prudentia! supervisory reporting fra$e2or.@ 3ui!ding a L(e$oryM on a!! supervised institutions and setting up a $ar.et inte!!igence and survei!!ance unit 7(IS58 #estructuring the syste$ of 3an. inspections in ter$s of focus1 process1 reporting 9 fo!!o2 up. Strengthening the statutory audit of 3an.s and en!arging the ro!e of auditors in the supervisory process inc!uding using the$ as agents. Strengthening the interna! defences 2ithin the supervised institutions such as corporate governance1 interna! contro! and audit functions1 and $anage$ent infor$ation and ris. contro! syste$s1 as an e6tension of the tas. of supervision. 5+ &estructuring the System of Financial Supervision *o start 2ith1 e6pert 2or.ing groups 2ere constituted in 1))4 to devise revised strategies of onsite supervision over 3an.s and < F&s for continuous supervision. So$e of the i$portant steps ta.en 3ased on the reco$$endations of these 2or.ing groups are as under= a8 &hanges in freBuency?periodicity of inspections1 restructure reporting for$ats and introduce ne2 off-site reporting syste$1 introduction of three types of supp!e$entary on-site assess$ents in 3et2een the statutory e6a$inations1 #ating syste$ for 3an.s 3ased on the internationa! &0(/;S $ode! as a!so $ore focused and enforce$ent-oriented fo!!o2-up 3ased on the reco$$endations of Pad$ana3han Ior.ing 'roup. 38 *oning up of the interna! contro!?audit function in 3an.s and $ore particu!ar!y the safeguards to 3e adopted in /+P environ$ent. c8 Introduction of an effective prudentia! reporting syste$ and registration process for < F&s 3y s2itching over fro$ the then prevai!ing co$p!iance $onitoring syste$ 2ith reference to # I directions on deposit ta.ing activities of such co$panies. *he reports of a fe2 $ore Ior.ing 'roups? &o$$ittees are either under consideration or the reports are e6pected short!y. *onitoring of overseas branches of Indian banks 0 Ior.ing 'roup consisting of senior officia!s of 3an.s and # I revie2ed the reporting?$onitoring syste$ covering overseas operations of Indian 3an.s and reco$$ended a series of $easures for toning up the head office?# I supervision in this area. *he revised

procedures1 2hich 2ere fina!ised in consu!tation 2ith the 3an.s1 have co$e into force fro$ the Buarter ending :une 2,,,. 6niform guidelines on 7rite#off8 compromise settlements 0 Ior.ing 'roup of professiona! 3an.ers constituted in :u!y 1))% e6a$ined the practices fo!!o2ed 3y pu3!ic sector 3an.s in arriving at co$pro$ise sett!e$ents and reco$$ended certain guide!ines that $ay 3e fo!!o2ed 3y 3an.s. *hese guide!ines have 3een circu!ated a$ongst 3an.s for adoption. Checklist for Inspecting )fficers 0 Ior.ing 'roup co$prising interna! auditors fro$ 3an.s and &hartered 0ccountant professiona!s constituted in :u!y 1))% reco$$ended guide!ines for # I Inspectors for o34ective eva!uation of the interna! audit syste$ in 3an.s. ased on these guide!ines1 a chec.!ist has 3een designed for the use of the 3an. inspectors and a!so circu!ated a$ongst 3an.s for use 3y their interna! auditors. Study of large value bank frauds In the conte6t of gro2ing incidence of !arge va!ue frauds in 3an.s a Ior.ing 'roup of e6perienced 3an.ers 2as set up in :une 1))% to conduct an in-depth study of frauds of #s.1 crore and a3ove reported 3y co$$ercia! 3an.s during the !ast three years. *he 'roup1 after ana!ysis of over 1,, !arge va!ue reported frauds1 $ade severa! reco$$endations for i$proving the fraud prevention ?$onitoring syste$ in 3an.s. *he report has 3een for2arded to the 3an.s 2ith advice to initiate i$$ediate action. Nostro Accounts# &econciliation &onsidering de!ay in ad4ust$ent of outstanding entries in nostro accounts of pu3!ic sector 3an.s a Ior.ing 'roup consisting of senior !eve! officers fro$ pu3!ic sector 3an.s and # I 2as set up in (arch 1))% to suggest so!utions. 0fter ana!ysing the i$portant causes for !arge pending entries and the present syste$ and procedure fo!!o2ed 3y 3an.s in the area of reconci!iation of nostro accounts entries1 the 'roup suggested various $easures for effective contro! and $anage$ent of nostro accounts reconci!iation 2hich have 3een co$$unicated to 3an.s. Non# S0& Investments &onsidering the !arge proportion of invest$ents in unBuoted 3ond? de3entures $ade 3y 3an.s through private p!ace$ents under non- S;# category1 a *echnica! 'roup1 2ith officia!s dra2n fro$ *reasury +epart$ents of 3an.s1 2as set up in 0ugust 1))% to study and suggest appropriate $easures. *he 'roup 2as assigned the tas. of suggesting $easures for regu!ating such invest$ent and 3ringing in $ore transparency1 accounta3i!ity and ris. perception. *he reco$$endations of the 'roup 2ere e6a$ined in consu!tation 2ith e6perts on the su34ect and suita3!e prudentia! guide!ines for va!uation of S;#?<on S;# invest$ents 2ere issued to co$e into effect fro$ Septe$3er 3,1 2,,,.

10

9+ Corporate :overnance and *anagement :uidance *he reBuire$ents of the corporate governance fra$e2or. differ across institutions 3ecause of the different o2nership structures of the co$$ercia! 3an.s. Pu3!ic Sector 3an.s are !arge!y o2ned 3y the 'overn$ent. *he $a4ority ho!ding in State an. of India is he!d 3y # I and State an. of India ho!ds $a4ority shareho!ding in its seven associate 3an.s. 7*hese ho!dings are gradua!!y 3eing divested8. *he o!d private sector 3an.s have traditiona!!y 3een o2ned and contro!!ed 3y co$$unities1 groups or regiona! interests. *he ne2 private sector 3an.s are o2ned and $anaged 3y financia! institutions or $a4or corporates though the shareho!ding pattern is increasing!y diversified 2ith fresh issues of capita! as part of start up covenants. *he foreign 3an.s are in essence 3ranches of overseas entities though a ;oca! 0dvisory oard provides genera! guidance. /ven a$ongst financia! institutions1 there are 3oth state o2ned and private sector entities.

*he corporate governance fra$e2or. in these institutions has 3een strengthened through regu!ation1 supervision and through interaction 2ith the $anage$ent of these institutions. *hese $easures cover responsi3i!ities of the 3oards of 3an.s1 disc!osure and transparency in pu3!ished accounts1 and shareho!der and sta.eho!der rights and contro!s. *he rating on $anage$ent 7(8 2hich has 3een introduced as part of the &0(/;S supervisory process ta.es into account the 2or.ing of the 3oard and its co$$ittees inc!uding the 0udit co$$ittee1 effectiveness of the $anage$ent in ensuring regu!atory co$p!iance and adeBuacy of contro! e6ercised 3y the head ? contro!!ing offices. *he audit function is an i$portant e!e$ent of the corporate governance process and the independence of this function is crucia! to good corporate governance. 0udit &o$$ittee of the oards1 constituted at the instance of # I1 perfor$ the ro!e of overseeing concerns a3out interna! contro!s and reco$$endations for their i$prove$ent. *o ensure 3oth professiona!is$ and independence of these co$$ittees1 &hartered 0ccountant directors on the 3oards of 3an.s are $andatory $e$3ers and the &hair$an or &hief /6ecutive Officer is not to 3e part of the 0udit &o$$ittee. Foreign 3an.s are not insisted upon to have !oca! audit co$$ittee for their Indian 3ranches. *heir 3ranches have a co$p!iance function that reports to their head office on the 3ranchesD co$p!iance 2ith # I inspection findings and features arising out of interna! inspections and statutory audit. # I has <o$inee directors on the 3oards of a!! pu3!ic sector 3an.s and so$e of the o!d private sector 3an.s. Further1 the 'overn$ent a!so no$inates directors on the 3oards of a!! pu3!ic sector 3an.s. Of !ate1 # I has 3een 2ithdra2ing its no$inees fro$ the 3oards of 2e!! $anaged o!d
11

private 3an.s. *o i$prove the effectiveness of the non-officia! directors and 3ring in effective corporate governance at the 3oard !eve! in 3an.s1 guide!ines have 3een issued focusing the attention of directors on certain areas such as 7i8 the prescri3ed ca!endar of reports ? returns to 3e p!aced 3efore the oard ? (anaging &o$$ittee of the 3an. 7iv8 corrective action reBuired to 3e ta.en 3y the 3an. on issues of supervisory concern 7v8 adherence to the dead!ines for co$p!ying 2ith various action points co$$itted under (onitora3!e 0ction P!an during discussions in 0nnua! Financia! Inspection findings as 2e!! as achieve$ent of targets agreed during (o5 discussions 2ith # I. Further1 the guide!ines a!so reBuire the directors to .eep 2atch on $atters 2hich co$e to the 3oard of the 3an.s as a!so 2hat shou!d have co$e to the 3oard and to infor$ the +epart$ent of an.ing Supervision on $atters of supervisory concern !+ ;ransparency and (isclosure # I has a!2ays 3een co$$itted to enhancing the e!e$ent of transparency and adeBuate disc!osures in the financia! state$ents of 3an.s. *he for$ats of 3a!ance sheet and profit 9 !oss account have 3een prescri3ed in the an.ing #egu!ation 0ct1 1)4)1 and 3an.s have to strict!y co$p!y 2ith this. *he accounts and 3a!ance sheets are reBuired to 3e du!y audited 3y statutory auditors 7inc!uding 3ranch auditors8 appointed 2ith the approva! of # I. Ihi!e internationa! accounting standards are 3road!y fo!!o2ed1 specific va!uation standards have 3een prescri3ed in respect of invest$ents and foreign e6change positions. *he tas. of $oving to2ards greater disc!osure 3y 3an.s in India 2as ta.en up in 1)%2 2hen the for$ats of the financia! state$ents 2ere revised and e6panded. Fo!!o2ing the !i3era!iAation $easures introduced in the 3eginning of this decade1 the process and e6tent of disc!osure 3y the 3an.ing syste$ has 3een further enhanced. Over the past fe2 years1 3an.s have 3een advised to disc!ose .ey infor$ation on capita! adeBuacy and co$position1 <P0Ds1 provisions1 invest$ents and shareho!ding of 'overn$ent. an.s are a!so reBuired to disc!ose certain critica! financia! ratios on profita3i!ity and efficiency. (ore recent!y1 3an.s have 3een as.ed to disc!ose $aturity pattern of assets and !ia3i!ities1 $ove$ent in <P0Ds and e6posure to sensitive sectors. 0s a part of its efforts to enhance the credi3i!ity of infor$ation avai!a3!e on Indian 3an.ing syste$1 # I pu3!ishes 7since (arch 1))%8 3an.-specific infor$ation on financia! and perfor$ance indicators1 inc!uding asset Bua!ity ratios1 &#0# and earning ratios in its annua! pu3!ication of E*rends and Progress in an.ing in IndiaD %+ Internal controls and housekeeping in banks (i) Internal Control Systems *he an. periodica!!y revie2s the steps ta.en 3y the pu3!ic sector 3an.s in the interna! contro! area through ana!ytica! reports covering the fo!!o2ing areas= #econci!iation of inter-3ranch accounts #econci!iation of inter-3an. accounts

12

#econci!iation of nostro accounts1 and Status of 3a!ancing of 3oo.s of accounts #econci!iation of c!earing differences

*he 3an.s 2ere given definitive ti$e fra$e to i$prove their interna! c!earing syste$s and the progress has 3een c!ose!y $onitored and fo!!o2ed up 3y the +epart$ent of an.ing Supervision. (ii) &econciliation of inter#branch accounts= *he c!ose $onitoring and periodica! discussions 2ith the &hair$en of 3an.s 3y the +eputy 'overnor had an i$pact in reduction of o!d unreconci!ed entries in inter-3ranch accounts of 3an.s1 a fraud prone area. *he continued pressure on 3an.s has 3een yie!ding the desired resu!ts inas$uch as the unreconci!ed entries have 3een su3stantia!!y reduced over the !ast three years. *o pro$ote effective concern in reconci!iation of de3it entries in inter-3ranch accounts the concept of $a.ing provision for net de3its outstanding for $ore than three years in inter >3ranch accounts has 3een introduced. *he cut off period for provisioning has 3een reduced to $ore than t2o years fro$ the period ended (arch 2,,1. Si$i!ar!y1 to have an effective $onitoring on re$ittance transactions1 the 3an.s have 3een advised not to route entries on account of such transactions through nor$a! inter 3ranch account 3ut evo!ve a separate account for this purpose. *he 3an.s have a!so 3een as.ed to ensure that outstanding entries under re$ittance transactions are reconci!ed on a 2ee.!y 3asis. an.s are reBuired to ensure that the practice of forced $atching of inter-3ranch entries shou!d 3e su34ect to appropriate chec.s and 3a!ances. 0ny forced $atching practice adopted 3y 3an.s for ad4ust$ent of o!d unreconci!ed entries in inter-3ranch accounts shou!d have the approva! of their 0udit &o$$ittee of the oard and the oard of +irectors shou!d 3e apprised of the fu!! detai!s of such practice. *he statutory auditors of the 3an. shou!d a!so !oo. into the 4ustifia3i!ity fro$ the ang!e of fair accounting practice. *here has 3een considera3!e i$prove$ent in the reconci!iation of inter-3ranch accounts in pu3!ic sector 3an.s and the position of un-reconci!ed entries pending for $ore than t2o years. *ota! nu$3er of un-reconci!ed entries over t2o years1 2hich stood at 22.5% !a.h entries 7#s. 5,",6 crore8 as on (arch 311 1))61 had dec!ined to 14."4 !a.h entries 7#s. 3%24 crore8 as on (arch 311 2,,,. (iii) 'alancing of books 0 re!ated concern that reBuired a c!ose $onitoring 2as the progress in reducing the arrears in 3a!ancing of 3oo.s at 3ranches of 3an.s. 0 reporting syste$ for 3an.s 2as introduced in :u!y 1))5 for $onitoring progress in respect of 3an.s having $ore than 5F of 3ranches having arrears in 3a!ancing of 3oo.s. 0 detai!ed report on 3an.s 2hich had arrears in 3a!ancing of 3oo.s at 3ranches accounting for $ore than 4,F of 3usiness are revie2ed at periodica! interva!s. *here has 3een a considera3!e i$prove$ent in 3a!ancing of 3oo.s in pu3!ic sector 3an.s since :une 1))" inas$uch as the tota! nu$3er of 3ranches 2here 3oo.s 2ere not 3a!anced ca$e do2n fro$

13

4245 as on :une 3,1 1))" to 1356 3ranches as on :une 3,1 2,,,. Further the nu$3er of 3ranches 2ith 3a!ancing arrears for $ore than t2o years had a!so co$e do2n fro$ 165, to 63, 3ranches during the a3ove period. (iv) &econciliation of Nostro accounts 0 Ior.ing 'roup consisting of three 3an.ers and a chartered accountant1 73esides # I officia!s8 has gone into the syste$ of accounting of <ostro accounts transactions 3y 3an.s and proposed so!utions for speedy reconci!iation of <ostro accounts entries in pu3ic sector 3an.s. *op (anage$ent of 3an.s 2hich have reported high pendency in this area are ca!!ed for a $onitoring discussion 3y the +eputy 'overnor and /6ecutive +irector. *he nu$3er of entries pending for reconci!iation in pu3!ic sector 3an.s had co$e do2n fro$ 14.6% !a.h entries 7#s. 22453) crore8 as on (arch 3111))6 to %.6, !a.h entries 7#s. %34)1 crore8 as on (arch 311 2,,,. (v) Strengthening of internal audit 8control system an.s 2ere advised to reconstitute the 0udit &o$$ittee of the oard 70& 8 2ith a vie2 to $a.ing the$ $ore independent and 2ith !arger representation of non-e6ecutive directors. *he 0& s are to 3e invaria3!y headed 3y a +irector 2ho is a chartered accountant fro$ a$ong the non-e6ecutive directors of the 3an.. *he $inutes of 0& are to 3e p!aced 3efore the oard of +irectors on an ongoing 3asis to serve as a !in. 3et2een their functioning. 0!! pu3!ic sector 3an.s 2ere advised to appoint a senior officer of the 3an. as &o$p!iance Officer 2ho shou!d act as a noda! agency to ensure co$p!iance of interna! $anage$ent contro!s as 2e!! as regu!atory and guidance. (vi) Audit system in banks *he an. has evo!ved syste$s and nor$s of e$pane!$ent and appoint$ent and re$uneration of statutory auditors in 3an.s and pay$ents for specia! va!idation audit and provided guidance on accounta3i!ity aspects under statutory audit of 3an.s1 Bua!ity and coverage of statutory audit reports1 syste$ of concurrent audit and its coverage in 3an.s. Further1 the 3an.s 2ere advised to revie2 the present syste$ of concurrent audit i$$ediate!y and incorporate necessary changes therein 3ased on the guide!ines of # I. *he 3an.s are a!so to revie2 once a year the effectiveness of the syste$ and ta.e necessary $easures to correct the !acunae in i$p!e$entation. (vii) Fraud monitoring *he syste$ of interna! contro! and fo!!o2-up in respect of cases of !arge frauds of #s.1 crore and a3ove reported to the # I is revie2ed periodica!!y. *he e$phasis on house .eeping aspects has he!ped in detecting !arge frauds and instituting fraud prevention $easures. an.s are cautioned a3out the detai!s of individua!s?co$panies?fir$s? proprietary concerns invo!ved in perpetration of frauds1 furnishing detai!s of their directors?partners

14

?guarantors?associates. In addition1 $odus operandi of ne2 types of frauds is a!so circu!ated a$ong 3an.s and financia! institutions1 to put the$ on guard. # I a!so conducts specia! scrutiny in respect of !arge va!ue frauds at the 3ranch?contro!!ing office !eve! to find out !apses contri3uting to the frauds. 0!! cases of frauds invo!ving !arge a$ounts are ana!ysed to identify the contri3utory factors and ta.en up 2ith the 3an.s concerned for re$edia! $easures. *he aspects re!ating to recovery1 staff accounta3i!ity and i$prove$ent in interna! contro!s are a!so pursued 2ith the 3an.s 2hich are advised in the process to report the fraud cases to Po!ice?& I1 if not a!ready done. +etai!ed instructions have 3een issued 3y #eserve an. of India to2ards strea$!ining fraud prevention and contro!?$onitoring syste$. Iith a vie2 to e6pediting the investigation of fraud cases1 # I reports cases invo!ving #s. 1 crore and a3ove as a!so those revea!ing inter-state ra$ifications irrespective of the a$ounts to & I. *he 3an.s are advised to e6a$ine staff accounta3i!ity aspect in a!! cases. O3taining photographs of accountho!ders 2hi!e opening accounts is one of the $easures introduced to contro! frauds. In-depth e6a$ination of !arge va!ue frauds reported 3y co$$ercia! 3an.s 2as conducted 3y a Study 'roup under the &hair$anship of &(+ of a pu3!ic sector 3an.. *he group indicated co$$on types of frauds 3y giving the $odus operandi thereof and reco$$ended severa! $easures for ear!y detection and prevention of frauds inc!uding reco$$endations for i$prove$ent in interna! contro!1 house-.eeping1 vigi!ance1 $anage$ent1 etc. 0part fro$ i$p!e$enting the reco$$endations the 3an.s 2ere advised to adopt certain $easures to avoid de!ay in reporting. It has a!so 3een decided that if !arge va!ue frauds 2ere due to non-o3servance of prescri3ed interna! contro! syste$1 certain restrictions are to 3e p!aced on opening of ne2 3ranches 3y these 3an.s. *he 3an.s have 3een advised to scrupu!ous!y fo!!o2 the ti$e !i$it !aid do2n 3y &hief Kigi!ance &o$$issioner 7&K&8 and the position of adherence to &K& guide!ines revie2ed 3y their 3oard on a Buarter!y 3asis. If these guide!ines are not strict!y fo!!o2ed1 the concerned 3an.s shou!d furnish a report to the &K&. 0n 0dvisory oard on 3an. frauds 2as set up 3y the 'overnor1 # I 2ith effect fro$ (arch 11 1))" under the &hair$anship of Shri S.S. *arapore1 for$er (e$3er of FS and +eputy 'overnor of # I and five $e$3ers dra2n fro$ areas such as !a21 ad$inistration1 po!ice1 professiona! accounting and co$$ercia! 3an.ing. *he oard has since 3een converted as &entra! 0dvisory oard on an. Frauds and functions as part of the &entra! ureau of Investigation 7& I8 of 'overn$ent of India. *he oard advises on the cases referred 3y the & I either direct!y or through the (inistry of Finance for investigation? registration of cases against 3an. officers of the ran. of 'enera! (anager and a3ove. *he +epart$ent of an.ing Supervision is providing the secretaria! assistance and # I $eets the cost of the functioning of the oard. + Core -rinciples for /ffective 'anking Supervision *he an. has continued 2ith the post-!i3era!isation strategy of setting prudentia! nor$s 3ased on internationa! 3est practices 2ithin 2hich 3an.s are !eft free to operate. *he co$p!iance of the an. 2ith the ase! &o$$itteeDs &ore Princip!es on an.ing Supervision 2as gone into in great

15

detai! and the gaps in supervision 2ere addressed 3y setting up seven in-house groups to $a.e necessary reco$$endations. *he reports of these groups 2ere discussed 3y the FS in a specia!!y convened session and the agenda set for action to 3e ta.en to 3ridge the gaps. Since then1 the co$p!iance is 3eing $onitored on a regu!ar 3asis. *he FS a!so authorised the re!ease in the pu3!ic do$ain of the assess$ent of co$p!iance1 and this docu$ent is 3eing shared 2ith overseas supervisory agencies and internationa! financia! institutions. *he I(F a!so co$p!eted an assess$ent using the revised $ethodo!ogy of the &ore Princip!es 2hich 2as in !ine 2ith the an.Cs o2n assess$ent. # IDs efforts in this area have 3een 2e!! recognised in internationa! foru$s and in 0ugust 1)))1 it 2as $ade a (e$3er of the &ore Princip!es ;iaison 'roup 7&P;'8 of the ase! &o$$ittee for an.ing Supervision1 2hich has 3een set up to pro$ote the i$p!e$entation of the &ore Princip!es 2or!d-2ide. # I has a!so e6a$ined the proposed <e2 &apita! 0deBuacy Fra$e2or. current!y under discussion 3y the & S1 and has co$$unicated its response to the ase! &o$$ittee. # I is a!so represented on the Ior.ing 'roup of &apita! of the &ore Princip!es ;iaison 'roup1 2hich has 3een constituted to o3tain the inputs of the non '-1, countries in the internationa! standard setting e6ercise. $+ Future Agenda Consultative -rocess= One of the $a4or changes 3rought a3out in the supervisory functioning is to introduce a consu!tative process 2ith 3an.s preceding the introduction of $a4or $easures. *he guide!ines on 0sset-;ia3i!ity (anage$ent 70;(8 and on co$prehensive #is. (anage$ent Syste$s have 3een fina!ised in 1))) on the 3asis of feed3ac. received fro$ 3an.s and the 3an.s advised to i$p!e$ent the guide!ines. *he supervisory focus in the co$ing years 2i!! 3e to $onitor the progress of i$p!e$entation of these syste$s and to ensure their fu!! coverage. &onsu!tative process has a!so 3een fo!!o2ed 2hi!e introducing the guide!ines for invest$ent in non-S;# securities and revie2 of reporting syste$ covering overseas 3ranches of Indian 3an.s. &isk#'ased Supervision= 0 ris. 3ased supervisory regi$e as a $eans of $ore efficient a!!ocation of supervisory resources is a!so 3eing considered. *he ris. 3ased supervision pro4ect1 2hich is 3eing guided 3y internationa! consu!tants 2ith the assistance of +epart$ent for Internationa! +eve!op$ent 75H81 2ou!d !ead to prioritisation of se!ection and deter$ining of freBuency and !ength of supervisory cyc!e1 targeted appraisa!s1 and a!!ocation of supervisory resources in accordance 2ith the ris. perception of the supervised institutions. *he #is. ased 0pproach 2i!! a!so faci!itate the i$p!e$entation of the supervisory revie2 pi!!ar of the proposed <e2 &apita! 0ccord1 2hich reBuires that nationa! supervisors set capita! ratios for 3an.s 3ased on their ris. profi!e. -rompt Corrective Action= *o guard against regu!atory for3earance and to ensure that regu!atory intervention is consistent across institutions and is in .eeping 2ith the e6tent of the pro3!e$1 a fra$e2or. for Pro$pt &orrective 0ction has 3een deve!oped. *he P&0 fra$e2or.1 2hich 2i!! !in. regu!atory action to Buantitative $easures of perfor$ance1 co$p!iance and so!vency such as &#0#1 <P0 !eve!s and profita3i!ity1 has 3een circu!ated for discussion and suggestions to a 2ider audience of 3an.s and interested pu3!ic1 and 2ou!d no2 3e considered 3y the FS 3efore 3eing i$p!e$ented.

16

Consolidated Supervision= 0n approach of conso!idated supervision that1 2hi!e !eaving the responsi3i!ity of supervision of 3an. su3sidiaries to their respective regu!ators1 2i!! a!!o2 3an. supervisors to o3tain a conso!idated vie2 of the operations of 3an. groups has 3een approved. *his 2i!! a!so reBuire greater coordination 3et2een the different supervisors in the financia! sector. Guarter!y reporting 3y parent 3an.s on .ey areas of functioning of su3sidiaries has 3een introduced fro$ the Buarter ending Septe$3er 2,,,. *he 3an.s are no2 3eing reBuired to anne6 the financia! state$ents of their su3sidiaries a!ong 2ith their annua! accounts. 0 Ior.ing 'roup has 3een set up to !oo. into the introduction of conso!idated accounting and it 2ou!d su3$it its report 3y (ay 2,,1. *hus1 the co$ponents of this diversified approach are 3eing gradua!!y put in p!ace. 6pgrading &eporting Systems= Iith the increasing re!iance upon off-site reporting as an instru$ent of supervision1 upgradation of syste$s has 3een a focus area of the FS and this focus 2i!! continue in the future. *he pro4ect under 2ay to $ove the survei!!ance data3ase to #+ (S 2ith a data-2arehousing co$ponent 2i!! provide !ine supervisors the a3i!ity to c!ose!y $onitor 3an.s and detect vu!nera3i!ities in the syste$ at an incipient stage. Skills 6pgradation= *he s.i!!-set reBuired 3y supervisors has changed radica!!y over the past fe2 years. Iith the introduction of techno!ogy and ne2 products and the $ove to2ards ris.3ased supervision1 the de$ands on supervision have a!so increased. *hus1 $eeting the training needs of supervisors in this changing environ$ent 2i!! 3e a priority area and 2i!! 3e $onitored continuous!y. In the co$ing years1 the # I 2i!! continue to guide the deve!op$ent of supervisory prescriptions and practices a!ong the !ines of internationa! 3est practices 3ased on g!o3a! standards so as to strengthen 3oth the supervisory regi$e as 2e!! as the Indian 3an.ing syste$.

17