• s.2 CORE PRINCIPLES .

FOR
SUPERVISION: EFFECTIVE

The Bank for International Settlements (BIS) has prescrib . •

·d 1 • ed a
umber. ·of gu1 e ines• to ~en .
tral banks to bnng b
n . . • a out uniformity
in their supervisory . role. -It •has given detai.1ed gu1d .. . ·
. . ehnes
regarding prudential nor.ms, asset qual ity· risk.· management etc..
• . th . ,
• To s~pervise e b~ ~n g and non-~anking seCtors, it had
prescnbed 25 cor~ .R1:111c1ples 1997-1998. and it increased to 29
prin~iples later _on. .Ma~y c~ntral banks are f~Uowing the
with the glob
. prin<dples to be~ ~ pa~!:-.: al standards.·-~ ·
. ·~ ·, • - ,,. . 4

.•. f."", .~,·•. :

, .The .coi~ pflll~lpies -~·~ere fr~~~d by) he Basel Committee on

Banking· Supe.rvision •in -~9_97.. They ,refer to a set of •minimum
stand~rds tq be followed by all central banks for effective
supervision. Originally th~re:_'ve're' 25' principles: L~ter On four
more principles •were added ·and at ·present there .are 29 core
princip~es for· effective supervisio~.--By framing t~ese principles,
the Basel ~pmmittee has set . .
a ~if orm s~and~~d of superyision to
_b~ f~llo~eq_~y all c~.n~ra~. ~a-~k~. ~il e the_principles 1_ to 13 are
_concerned 'With the supervisors,. the principles from 14 to 29 are
related to the b~nks. Principles 1 to 13 de3.l with the powers, ,
functions and ·responsibilities of the.:sUperviSor and principles
14 to 29 are related to prude~tial norms to be followed by banks.
CORE PRINCiPLES FOR THE SUPERVISORS: • •
. •• . • · • 11ca• ble to the central banks
. The first thirteen principles are app •
. :under .the central. ,bank·. .The .
•or. the .department of •sup_erv1.s1on
Principles are as follows: • •·• ·, ' · ••: •
 Vipal's™ Central 8
anL·
1
ffw~w$ ~Ing(

gs I ;,,, 'b;t·t·ies objedi~es and powers: aa11

• ons1 1 1 .
(1) Principle 1: Resp d. tes the responsibilities ob·
. l rly in ica . .• ' Jeer
This principle .c ea . ·ng authority.. The supervis lves
h superv1s1 ors
and powers of t e legal powers to supervise the b &re
. h the necessaryt· n for a sound and. safe b at\t.
rovided wit .. .
P corrective ac io . ank~
and suggest •• ( & t..-

system. • dence, accountability, resourcin

(2) Principle 2: Indepen isors: g al\d
le al protection for sup_erv •
g . rational freedom, transparent Pr0cesses
ervisor has ope . .
The suP Adequate resources are available and
d d governance. .. , . th
t ble to its duhes,and use ofresources. ,,}
1

an so~ . .
ervisor 1s accoun a . t1us
P
s':mciple also implies legal_ protect_ion to t~e ~~pe~1~~r. -- .
P •· · d • 11 b at1on•
(3) Principle 3: Cooperation a~ c_o .} o~ , : • ' > .. :
-La~; and re~ations provi~e ~· fyaip.ew~rr for cooperation
and collaboration ~ith, 1,~0 .1:11.~~ti~, .- ~u,t~~~!i~S. . a11d foreign
rd
supervi50rs: _ThiS -· .!s , •f~\.~: ~af~~~ mg .. _~onfidentiaJ
/ !-'o.rmation. • ,., ~· .'· •. '.-•·' _· . : -, •. • ••
ll ll 1
• .: • ,.. r r · : .., , -;- :--; · ..... _-: •
" • ·, , ,• • - - , r -- ! } .. ; ; . . ,;, ..' 1 • J: :;._ ·-: ... • •- " ·"" • .. ) ,t

(4) Prlncii,le 4: P~~i.~sib_l~ activ,itt~s:, ;, •-.-1 ; .. •• : ; : . -_ _

• .r .. •
• ..; • •.. .t .-' 4

This principle deals -with ·the :Permissible activities of banks

which are licensed and· which are subject to supervision. - • •
•

(5) ·•Principle 5: Licensing criteria·: • .·•·' • - : • - -

• • ~rin~iP1e •:d~als: ·~ith :_liCf~~g •prOCess, criteria •to be
.•• Scltisfied f()~ Obta~g' li~ense, r~aSons for rejection etc. • •
_ .(6). Prin~ipte.6: Tr~nsfe~ of. siinific~t -~-~ership: • ,. , .. ...

_-Transfer: of -owriership .to other party can be reviewed or

re1ected 9r subject t~ p~dentialqorm5 by the superyisor- . .
<7) · Pri~~ip~e 7: ~~jor ~cquisitions: .. :
·.·.:Toe, supervisor. has: ·the ·power to approve or reject rnajo'
acquisitions or i~vestment~ by a bank. . , ... __
 ection and Off-site Monitoring
o~~.·te Insp . •••••• 99

(S) principle 8: Supervisory approach:

As per this principle the supervisor h t .
. h b k I f . as o assess the risk.
file of t e an s, p an or early intervent. ·t
P ro . h b • . ion .1 necessary and
t~Ice action if t ey ecome non-viable. .
(9) principle 9: Supervisory techniques and tools:
•
'Jhe supervisor. ~ses appropriate techniques and toors· to
conduct the superv1s1on. •
(tO) principle 10: Supervisory reporting:
1his is reia_t~d ~o collection and review •of reports from
banks and venfication by external auditors or through onsite
inSpection.. • • •
(11) Prin~iple ·-: .11: ·:- Corrective and sanctioning .powers of
.
. .

. . s~p~~~~<?~=- ·.:.: .. _-.- ,·/ ~--; , .. . •. .

• !. • - ,_ ... .. .. .. . . .

_. The supervisorJ ide~tifies' unsafe: practices that are risky ~d

takes correctjv~ ~cti~n•.· :. t: .: . . • :--,l" ! •
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(12) ;Pri~~ipl_e: .1~:-~ops~~J.dateid _sup~~isio11:: . ,_ .

•, -:,· .,_. r •• .,. ,.., . • ·, . . ''... .,: •.:. "" ""• :'\ _.., '•,-: ... -:;.:.. - -. • ,. ...

This principle implies that the supervisi9n is a consolidated

one applying tQ a_ll ~~p~cts_ qf busi~_ess. :: . ' .· .' ..· • - :e- .... - • .. .. ,
I

. • • ... f ,· ,.,, ! •.• - ' • . . -

. .

(13) Principle 1~: ~ome:-host ~elati~~ships:

• J • • . • • • •• •

This_ is .related·. to· ·sharing ~f ·information and· cooperation

between the superv:is_<?~~ .~!:. -~h~_ b~~g groups.
Supervisors require the locaJ banks and foreign bank~ to apply the ' ' I • " .

~me standards for ·operations. _

CORE PRl,NCIPLES :FOR • THE,BA_N.KS:.
(14) Principle 14: Corporate.govemanc_e:
·_ The supe~isor det~rmines ._that ban~. and banking grou:
~ye proper- . corporate governance. pohc1es. and processes
place. • . .
... . "
... • \, ... t .. -
100 Vipul'aTM C
entra1 a
al)L,
!\It)~
. . 1e 15.• Risk management process:
(lS) Pnnc1p . (Q~
11

•sor determines that banks have a co

The superv1 lllpreh
. nt system and it should be accordin
nsk manageme g to IQel\s.iv~
profile of the bank. e tis~
(16) Principle 16: Capital adequacy:
Prudential and capital adequacy norms are
set b
supervisor for the banks. y the
(17) Principle 17: Credit risk:
Credit risk manag·emei:it process is se"t by the SUpervis
. . . . or foqh
.
banks taking into account their rISk profile and macro e e
Conotni .
conditions·in which theyoperate. . c
(18) Principle 18: Problem assets, provisions and rese·rves:
This principle is r~latedJo identification of problem assets
maintenance of .adequate prov1s1ons
.. d
an -reserv~s. .
·
and

(19) PrinCiple 't9: ConCentration risk and large exposure lilllits:

This concerned With policies fof mitig'ating con~entration of
risks on a timely basis. · · · • ·. ··• • · .,. . · •
(20) Principle 20: Transactions wit~, r~l~ted parties: • ·_ . • •
This principle is for monitoring~ transactions ·with related
parti~s
, and deals with the risks of conflict
. of interest.
(21) Principle·21: Co~ntl'}' and tr~nsfer risks:
,

The sllpelViso[ determ4,.es that banks have adequate policies·

to deal with country risk and transfer risk in their international
. .
a
lending and investments on tiinely bci.sis. •
(22) Principle 22: Market risks:··
. This is related· to •'the provision. for an adequat~ risk
~gemerit system considering the risk 'profile of the banks,
their appetite for risks and macro economic conditions. •

I
I ,;
I

. ect·,on and Off-site Monitoring mnim"'m'•

,,..site 1nsP
. •• . ······, u u u
.~. 101

. , p..inciple ~: Interest rat~ risk in the banking bo· k·

(Z3) ~- . .. .. 0 •
. '{'his principle is to identify, monitor and mitigate-illterest rate
. ris1'S· . . •,
rinciple 24: Liquid~ty risk:
(24) P
'{'he supervisor sets prudent and appropriate liquidity •
requirements. for the banks_ that shows the liquidity needs of the .
bank5• . . .
. (2.5) Principle 25: Operational risk:
. This is r~l~t~d,to a prope! framewo~k to iqentify, evaluate.and
mitigate opera_ti<?~a~ r_isks and take. ti~ely ac~io~. r •

'
(26) Principle 26: Internal Control aitd audit: . .•
. . . .

•.This is con~emed w:ith the _internal controJ a·nd audit systems.

'fhey deal·wi~· co_mpliance· standards,·security of' bank's assets,
0

delegation of authority and responsibilities, internal audit system

. . . ..
. ,.

etC •.
•
-.- .. ,
. ,
r. '. , C. ..... •
t : . ., l • •.
.. .,...

(27) Principle 27: Finaitcial reporting and external audit: • •' • •

• • This is 'CoI\C~rned , With Illaintaini~g ·records and preparing
financial
. statemen~& according
.
to
. set rules.and publications. -
(28) Principle 28; _Dfsclos_~re and transparency: :=· . • _- .. ..
. t • \ •

As per this principle banks have to disclose all details related to

'
their financial-· c~ndition,:· p~r~~rmance, corporate governance
. policies etc. • •• _
f' •• : • ~· f :
1
• ; . I i I • • ' • 1

(2?) Principle 29: Abuse of financial services: . , .• .

This. i~ [~lated •to' :the Policie{ reSarding high ethical standards
professionalism -i~ the financial sector and prevent the bank
~Jonn b~ing-used for ·criminal activities·. •. '
- • The. Bat\k for. International •Settlements: (BIS) thus has laid
, "~0 Wn detailed. 'guidelines for effective .supervision. Co~tinuous
~:Visioits and improvements are _made by the BIS to make the
Pervision syste~ a sound on~. .,