The joint ventures (JVs) and subsidiaries of banks might come under the Reserve Bank of India’s purview if a high-level committee’s recommendations are implemented. At present, the central bank can only monitor banks’ subsidiaries and JVs, but it does not have supervisory power.
The committee, chaired by RBI Deputy Governor K C Chakrabarty, said: “Along with focus on supervision of banks on a solo basis, RBI should also focus on consolidated supervision of banking groups.”
It has proposed RBI enter into memoranda of understanding with other sectoral regulators to smoothen the process of supervision. Through subsidiaries and JVs, banks have forayed into various financial segments such as insurance, mutual funds, private equity and stock broking.
The committee also proposed to form a single-point contact in the form of a ‘supervisory relationship manager’ within the department of banking supervision to ensure effective communication with the supervised entities, and to aid the process. This was suggested in view of the fragmented set-up within RBI for supervising different entities belonging to the same banking group.
The panel has also recommended: “In view of the emerging challenges and ensuring optimisation of supervisory resources, a risk-based approach for supervision for commercial banks in India is recommended. It is imperative that each bank has a certain basic risk management framework in place before the RBS can be rolled out.” Regarding off-site supervision and to ensure quality and integrity of data, the committee recommended manual intervention in the flow of data to RBI from supervised entities be eliminated and penal provisions be invoked for deliberate filing of wrong data.
It has also proposed the present system of quarterly discussion with the top management of banks replaced with formal interactions, the periodicity of which may be determined by the supervisor, based on its risk assessment for a particular bank or the banking group.
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Also suggested for a complete overhaul is RBI’s internal rating system, known as CAMELS and based on capital adequacy, asset quality, management, earnings, liquidity and systems. “The existing CAMELS-based rating system would not be appropriate under the risk-based approach. Under the RBS, the focus of the rating framework should be to measure the riskiness of a bank and not to evaluate its performance,” it has said.
Under the risk-focused rating framework, the riskiness of a bank will be computed using a risk template for identifying the inherent prudential risk and the risk control elements for various risk groups. The report has also suggested separation of the posts of chairman of the board and the chief executive officer in all public banks.
Private sector banks are already following the system of having separate posts for chairman and CEO.