Let us learn the achievements of RBI during the pandemic, its noble goals of alignment with the long-term objective of streamlining regulatory and supervisory framework across regulated/supervised entities to maintain conformity among global practices. RBI while harnessing technology for customer services, undertook fraud detection and consumer protection also as its concurrent objectives. Capacity building of the personnel dealing with supervision, regulation, financial stability and enforcement functions was prioritized as enabling goals. Consistent bank failures to keep up with ever widening frauds enforced upgradation of RBI resources.
Claiming its annual report under the above title, RBI has enabled an average reader to go through its achievements under the following web address containing its report of 34 pages.
https://rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1319
Let us decipher through its report for learning pleasure. I have covered only a few topics out of this voluminous report with the promise to cover the others in near future.
Consisting of following 4 chapters and other annexures, the report of RBI emboldens us to look at the vast scenario of emerging frauds, strengthening of supervision among NBFCs, housing corporations, and other intermediaries, draws our attention towards goals for 2020-2021, actual performance and agenda for 2021-22. Banking gets prime position among others.
Chapter 1 Regulatory and supervisory measures
Chapter 2 Financial Stability unit
Chapter 3 Regulation of financial intermediaries
Chapter 4 Supervision of financial intermediaries
The other matters dealt with were as under:
Box VI.1 COVID-19 Related Regulatory Measures – A Cross-country Perspective
Box VI.2 Revised Regulatory Framework for NBFCs – A Scale-Based Approach
Table VI.2: Fraud Cases – Bank Group-wise
Table VI.3: Fraud Cases – Area of Operations
Box VI.3 -Changing Paradigm of UCB Supervision – Way Forward
Box VI.4 Structural Changes in Business Models of Non-Banking Financial Companies (NBFCs) and Strengthened Supervision
Table VI.4: Enforcement Actions
(July 2020-March 2021)
Box VI.5 Framework for Education from a Consumer Protection Perspective
Box VI.6 Deposit Insurance Pricing – Mitigating Moral Hazard through Risk-based Premium (RBP)
Regulation
Let us learn the progress made under regulation, the goals set for 2020-2021, and other major developments which enabled convergence of regulatory measures towards international standards.
The Department of Regulation (DOR) is the nodal Department for regulation of commercial banks for ensuring a healthy and competitive banking system, which provides cost effective and inclusive banking services. The regulatory framework is fine-tuned as per the requirements of the Indian economy while adapting to international best practices.
What were the major goals set for 2020-2021 and the achievements, particularly, in view of the major pandemic?
Convergence of the Reserve Bank’s Regulations with Basel III Standards: Draft guidelines on credit risk and market risk would be issued, in conformity with Basel III standards, along with the final guidelines on Interest Rate Risk in Banking Book (IRRBB); draft guidelines on minimum capital requirements for operational risk under Basel III standardized approach (SA) will also be issued.
However, to free up banks and supervisors to respond to economic impact of COVID-19 pandemic, the Basel Committee on Banking Supervision (BCBS) has deferred the implementation of Basel III standards by one year to January 1, 2023 (Para VI.17-18). This clearly indicates the non- application of Basel III standards as on date.
There might have been other developments which merit mention here.
Major developments
- Draft framework on securitization, issued on June 8, 2020 for public comments, is being examined and the final guidelines will be issued shortly. The revisions also take into consideration the recommendations of the Committee on Development of Housing Finance Securitization Market in India (Chair: Dr. Harsh Vardhan) and the Task Force on the Development of Secondary Market for Corporate Loans (Chair: Shri T. N. Manoharan), which were set up by the Reserve Bank in May 2019.
- Apart from reviewing the securitization guidelines, it was also decided to comprehensively revisit the guidelines for sale of loan exposures, stressed as well as those not in default, which are currently spread across various circulars, and accordingly a draft comprehensive framework for sale of loan exposures was released on June 8, 2020.
- These guidelines on sale of loan exposures have been specific to the asset classification of the loan exposure being transferred and/or the nature of the entity to which such loan exposure is being transferred as well as the mode of transfer of the loan exposures.
- it was announced in the Statement on Developmental and Regulatory Policies of December 5, 2019 that the Reserve Bank will facilitate the setting up of a self-regulatory body – Secondary Loan Market Association (SLMA) – that was then registered on August 26, 2020. SLMA is currently examining the various measures for the development of the secondary loan market, including standardization of loan documentation and loan sales platform. The progress is being monitored.
- With a view to ensuring credit discipline, instructions were issued on August 6, 2020 on the manner of opening of cash credit/overdraft (CC/OD) and collection/current accounts with banks depending upon the aggregate credit exposure of the banking system to a borrower.
- With the worsening financial position of Lakshmi Vilas Bank, on November 17, 2020, the Central Government imposed moratorium on LVB Ltd. up to December 16, 2020 and the Reserve Bank superseded the Board of Directors and appointed an Administrator.
- The Central Government accorded its sanction to the scheme of amalgamation and notified the ‘Lakshmi Vilas Bank Ltd. (Amalgamation with DBS Bank India Ltd.) Scheme 2020’ on November 25, 2020, which came into effect on November 27, 2020.
- To improve submission of statutory returns of Scheduled Commercial Banks on time and also avoid wastage of paper, with effect from reporting Friday August 28, 2020, the SCBs were advised to submit these returns in electronic form on XBRL live site using digital signatures of two authorized officials. Manual systems in vogue since 1970s come to an end.
- Let us look at COVID-19 Related Regulatory Measures – A Cross-country Perspective under which the measures initiated by India, being one of the fastest economically growing nation.
- Under 9 measures initiated by 14 central banks to face pandemic all over the world, India could take action under capital requirements, liquidity requirements, payout restrictions, liquidity measures and government bonds.
- Some of other initiatives included a discussion paper on ‘Governance in Commercial Banks in India’ which was issued by the Reserve Bank on June 11, 2020 to review the framework for governance in the commercial banks.
Agenda for 2021-2022
Let us narrate the agenda set for the next year for implementation.
For the year ending March 31, 2022, the Department will focus on the following key deliverables in respect of the commercial banks:
- Issuing draft guidelines on capital charge for credit risk (SA), market risk, operational risk and output floor, as part of convergence of the Reserve Bank’s regulations with Basel III standards;
- Issue of final guidelines on securitization of assets not in default; and
- Issue of final guidelines on transfer of loan exposure.
Supervision
During the year, the Reserve Bank continued with its work of strengthening the supervisory framework of the scheduled commercial banks (SCBs), urban cooperative banks (UCBs) and NBFCs. RBI has strengthened its off-site supervisory framework for identifying risks early by using various tools.
by creating a graded supervisory action framework, the supervisory approach of the Reserve Bank is now more forward looking, root-cause oriented, and incorporating both quantitative and qualitative elements into supervisory assessments.
Significant initiatives were taken towards furthering specialization and addressing the issue of asymmetry of information by way of:
a) integration of supervisory functions meant for different supervised entities (SEs);
b) specialization and reinforcement of supervision through both vertical and horizontal risk assessments, and
c) setting up a dedicated College of Supervisors (CoS) for capacity development. While continuing the efforts to strengthen the supervisory function, actions are also being taken to harness supervisory technology (Sup Tech).
The Department of Supervision (DoS) was entrusted with the responsibility of supervising all SCBs (excluding RRBs), Local Area Banks (LABs), PBs, SFBs, Credit Information Companies and all India financial institutions (AIFIs).
Agenda for 2020-21: Implementation Status – Goals Set for 2020-21(Intentionally I quote from main circular so that achievements will be commented later in my own words)
The Department had set out the following goals for supervision of SCBs during 2020-21:
1) A detailed prescriptive framework will be introduced, covering the roles and authority of the Chief Compliance Officer (CCO) of a bank, to bring uniformity in approach besides aligning the expectations on CCO with best practices (Utkarsh) [Para VI.52];
2) Assessment of risk and compliance culture and business strategy of SCBs to strengthen the health of the financial system, with special attention to the unique risks posed by climate change and implications for the supervisory framework (Utkarsh) [Para VI.53 – VI.54]; and
3) The Department will further strengthen the process of collecting supervisory data relating to KYC/anti money laundering (AML) which would facilitate better risk discovery, risk assessment and risk-based supervision (RBS) processes in respect of KYC/AML supervision, and the preparation of a model to risk profile the banks for carrying out risk-based KYC/ AML inspection” (Para VI.55).
Then what happened during the said period?
- To achieve 1) above, circular dated September 11, 2020 was issued emphasizing the importance of CCO. This has been covered in one of my earlier articles.
- The Department has developed a detailed risk and compliance culture assessment framework for the guidance of senior supervisory managers (SSMs) regarding internal control in banks.
- A similar one for the information of Senior supervisory managers containing guidance matter MSEs was also prepared and circulated.
- Risk-Based Approach (RBA) for KYC/AML: As part of their internal governance structure, banks are required to have a sound risk-management strategy for addressing the KYC/AML risks. The Reserve Bank, on the lines of recommendations of Financial Action Task Force (FATF), has developed RBA for supervision from KYC/AML perspective. A model for generation of risk scores, based on the KYC/AML data submitted by the banks, has also been developed. A specialized on-site assessment is also being carried out for select banks based on their KYC/AML risk scores/rating.
Major developments: Supervision of Internationally Active Indian Banks through Supervisory Colleges: The platform of supervisory colleges is being utilized to monitor internationally active Indian banks on an ongoing basis.
Root Cause Analysis (RCA): A special thrust is given from the current supervisory cycle towards carrying out RCA which, inter alia, includes a detailed assessment of governance, oversight and assurance function, business strategy and risk and compliance culture.
Automation of Income Recognition, Asset Classification and Provisioning (IRACP) Processes in Banks
Banks were advised, vide circular dated September 14, 2020, to automate their IRACP processes. In order to ensure the completeness and integrity of the automated asset classification [classification of advances/investments as non-performing asset (NPA)/non-performing investment (NPI) and their upgradation], provisioning calculation and income recognition processes, banks have been advised to put in place/upgrade their systems to conform to the prescribed guidelines latest by June 30, 2021.
Long Form Audit Report (LFAR) – Review: The revised guidelines related to Long Form Audit Report issued on September 5, 2020, inter alia, require the statutory auditors (SAs) to also report on special prudential supervisory requirements besides reporting on the financial statements.
Cyber Security Related Developments: Appreciating that the environment of cyber security and technology risks facing banks is constantly evolving, the Department has instituted a system of periodic interactions with Chief Information Security Officers (CISOs) of banks. This has become essential due to emerging use of cloud computing and open banking which has invited cyber based crimes to make clients of banks lose money.
Frauds Analysis: The number of frauds reported during 2020-21 decreased by 15 per cent in terms of number and 25 per cent in terms of value, vis-à-vis 2019-20. The share of PSBs in total frauds (both in terms of number and value) decreased while that of private sector banks increased during the corresponding period.
Keeping in view the average time lag between the date of occurrence of frauds and the date of detection was 23 months for the frauds reported in 2020-21, public sector banks reported 2903 frauds amounting to Rs.81901 Crores which amounted to 59.2% of total frauds reported for all banks. Compare this with 3710 cases for Rs. 46,335 Crores for private sector banks which constituted 33.5 % of the system as referred above.
However, it is not pleasant to know that in respect of large frauds of ₹100 crore and above, the average lag was 57 months for the same period.
Let us also broaden our vision towards the goals to be achieved during 2021-2022.
- Strengthening the on-site assessment of oversight and assurance functions including risk and compliance culture as also business strategy/model.
- Adoption of innovative and scalable SupTech to enhance the efficiency and efficacy of supervisory processes by modifying its capacity and capability (Utkarsh).
- Streamlining the process of data collection from all the banks and their off-site assessment and on-site supervision of select banks based on the outcome of risk-based model developed for KYC/AML supervision; and
- Enhancement of Fraud Risk Management System including improving efficacy of Early Warning Signal (EWS) framework, strengthening fraud governance and response system, augmenting the data analysis for monitoring of transactions, introduction of dedicated market intelligence (MI) unit for frauds and implementation of automated unique system generated number for each fraud.
Conclusion
Some of the concluding sentences from the report indicates that “additional regulatory measures were adopted, apart from extending the existing ones, in response to the disruptions in the financial system owing to COVID-19 pandemic. Steps were taken for increasing credit flow to corporates and small business segment. Measures were also undertaken to strengthen regulatory and supervisory framework of SCBs, cooperative banks and NBFCs in line with the global best practices, and also with an objective to bring them under uniform enforcement framework to minimize the policy arbitrage.”
My observation
It could be seen that RBI could include only 5 measures as compared to 9 measures by international banks under prudential rules and regulations, liquidity and lending, and asset purchases/sales which does indicate the miles to travel by our regulatory authorities under pandemic conditions. RBI has indicated a large number of additional initiatives to forestall frauds by adequate planning, creation of special cells to adopt the latest technology and train special type of supervisory senior managers to handle these tasks from now onwards. Though any one would welcome these developments, the lurking fear exists regarding whether we are still prepared adequately to meet the crooked business men, emerging cyber based crimes which take place instantly leaving the bankers to look after the direct effects on its customers, particularly senior citizens, poor and vulnerable villagers who believe in banks as the means for development and the successful new industrial entrepreneurs.
I did not include topics under cooperative banks, NBFCs, or other topics extensively explained by RBI which I may cover in near future.
Time has come for preparation for future, just now, but not with a time lag. “No more why it happened” explanations will help.
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