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Risk-based supervision kicks off

Calcutta, April 20: The Reserve Bank of India (RBI) has started risk-based supervision (RBS) of banks. It has sent prudential norms to help them measure their financial health in an independent manner. If the financial status is found to be satisfactory, the annual inspection of a bank could be skipped.

It was announced by RBI governor Bimal Jalan in the Monetary and Credit Policy for 2000-01. PricewaterhouseCoopers was appointed to review the existing practices and suggest a more sophisticated form of RBS.

The RBI will rate banks after studying compliance reports sent by them. The best performers will not undergo annual inspections. RBI will, however, be free to conduct onsite and offsite inspections. “If a report is delayed, RBI will talk to the bank’s management to set things right,” senior RBI officials said.

The central bank paper on RBS says the basic objective is to allocate resources for supervision and pay attention to the risk profile. “The system is expected to optimise utilisation of resources and minimise the impact of a crisis on the financial system,” it states. RBS details processes that ensure continuous monitoring and evaluation of risks in business strategy and exposures. A risk matrix facilitates the assessment.

The key parts of the risk profile document are: CAMELS (Capital adequacy, Asset quality, Management, Earnings and Liquidity) rating; narrative description of key risk features under each CAMELS component, summary of key business risks, monitorable action plan and bank’s progress to date and SWOT (strength, weakness, opportunities and threat) analysis.

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