A High Level Steering Committee (HLSC) for Review of Supervisory Processes for Commercial Banks was constituted by the Governor, Reserve Bank of India on August 3, 2011. The HLSC was chaired by Dr. K.C. Chakrabarty, Deputy Governor. Members of the HLSC comprised Shri B. Mahapatra, Executive Director, Reserve Bank, Shri Basant Seth, Chairman and Managing Director (Rtd.), Syndicate Bank, Smt. Chanda Kochhar, Chief Executive Officer, ICICI Bank Ltd., Shri Diwakar Gupta, Managing Director and Chief Financial Officer, State Bank of India, Prof. J R Varma, Indian Institute of Management, Ahmedabad, Shri M B N Rao, Chairman and Managing Director (Rtd.), Canara Bank  and Shri G. Jaganmohan Rao, Chief General Manager-in-Charge, Department of Banking Supervision (Member Secretary).

The HLSC was mandated to suggest measures for making the supervisory processes for commercial banks more effective and useful to the supervised entities as well. The terms of reference for the Committee included a mandate for reviewing the extant approach, methodology, processes/tools for onsite and off-site supervision, supervisory rating and stress testing frameworks and recommending measures for a gradual progression to a risk based supervision framework. The Committee has since submitted its Report to the Governor on June 11, 2012.

The Committee expects that the recommendations made in the report would transform the approach and processes for supervision of commercial banks in India thereby bringing them in line with the international best practices and standards and ensuring safety and stability of Indian banking system in the coming decade.

Major Recommendations of the Committee

Objectives of Supervision

An implicit overarching objective of RBI’s supervisory process should also be to ensure financial stability and customer protection, along with protection of depositors’ interests and ensuring the financial health of individual banks/FIs. (2.6.5 &  2.6.6)

Approach to Supervision – RBS

Risk Based Supervision (RBS) which focusses on evaluating both present and future risks, identifying incipient problems and facilitates prompt intervention/ early corrective action should replace the present compliance-based and transaction-testing approach (CAMELS) which is more in the nature of a point in time assessment. (2.6.27)

Under RBS, the supervisory stance would be determined based on a supervisory analysis of Probability of failure of a bank and the likely Impact of its failure on the banking/financial system. Thus, the periodicity/intensity of on-site inspection of a bank would depend upon its position on the Risk-Impact Index Matrix rather than its volume of business. (3.7.9)

The success of RBS approach is highly incumbent upon a robust offsite surveillance system. In this regard, there is a need to eliminate any manual intervention in the flow of supervisory data from the banks to RBI and also ensure quality/integrity of data submitted.  ( 2.6.29 & 3.6.4)

The supervised entities would benefit from the flow of frequent information and feedback they receive from the assessment and supervision of risk areas identified by the supervisor. (3.7.5 & 4.23) 

Supervisory Rating under RBS

Under the proposed RBS, the supervisory rating would be a reflection on the risk elements (inherent business risks and effectiveness of control) and would not be an exercise in performance evaluation as under the CAMELS rating Framework.  The supervisory rating exercise would aim at determining the overall probability of failure of the bank in light of risks to which the bank is exposed, strength of control/governance and oversight framework in place and available capital. Based on the exercise, the bank would be apprised of the direction/trend of key risk groups along with overall risk faced by it. Further, a risk mitigation plan, comprising of need for improving controls, augmenting capital and/or restructuring business would be given to the bank. ( 4.11, 4.12, 4.22 & 4.23)

The supervisory intervention including placing a bank under the Prompt Corrective Action (PCA) framework, if required, would be based on the supervisory rating and the risk-impact score of the bank. ( 3.7.11 & 4.23)

Thematic Reviews

The supervisor would increasingly use thematic reviews as a tool of supervision whereby review of a particular product, market or practice using a specialized team would be made to assess risks brewing within the sector or at system level for enabling prompt actions/measures. (3.11.3)

Consolidated Supervision

To facilitate effective consolidated supervision, the supervision of all group entities under the jurisdiction of RBI has to be brought under a single supervisory department as against the present fragmented set up for supervising different entities belonging to the same banking group. (2.6.15)

Jurisdiction of supervision

The domains of regulation and supervision should be firmly demarcated and any entity-specific decision should only emanate from the supervisory department. This is necessary for clarity of jurisdiction for the supervised entity and for making the ‘Supervisory Relationship Manager’ an effective single point of contact in the Department of Banking Supervision. The communication between the supervisor and the supervised entity is confidential and, therefore, should not be subject to any public scrutiny. (2.6.19)

Single Point of Supervisory Contact

A single point interface within RBI in the form of a Supervisory Relationship Manager(SRM) for each bank within the supervisory department would ensure efficient and effective communication between the supervisor and the supervised entity (2.6.18 & 6.7.5)

Building of Supervisory Skills

In view of the need to improve skill sets of supervisors in the RBI and creating a knowledge pool of specialists with legal, banking, audit etc. backgrounds, training in specified areas, lateral induction of specialists and a system of continuous movement of people from RBI to external organizations and vice versa may be considered to augment supervisory resources of the RBI. (6.8.7)

Alpana Killawala
Chief General Manager

Press Release : 2011-2012/2023

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