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RBI sets stage for a bank supervision overhaul

CAMELS set to give way to a more forward-looking rating system, the central bank seeks cooperation from overseas regulators

Manojit Saha  |  Mumbai 

The Reserve Bank of India (RBI) has decided to change the way it monitors and supervises banks in order to make the process more forward-looking. The move comes against the backdrop of the risks that have emerged after the global financial crisis of 2008, with lenders shifting from offering traditional products to more complex ones.

The country’s financial sector would now be evaluated under a dynamic risk-based mechanism, an aspect the present CAMELS rating system lacked, central banking sources said. RBI proposes to replace CAMELS with INROADS (Indian Risk-Oriented and Dynamic Rating System) from the next round of annual financial inspection, in 2013.

At present, the central bank uses the CAMELS (Capital adequacy, Asset quality, Management, earnings, Liquidity, and Systems and control) method, to assign ratings to Indian banks. CAMELS, which goes from A+ to D is assigned to a bank while finalising the annual financial inspection (AFI) report.

The changing landscape of banking supervision
  • CAMELS rating system to be phased out, as it lacks forward-looking assessment and merely represents banks’ performance
  • New system, INROADS, to capture the risks that may cause a bank to fail
  • Annual Financial Inspection report to be fast-tracked
  • Single-point contact at RBI to bridge regulatory gap
  • Information-sharing agreements with overseas regulators on cards

RBI has argued that the present form of rating captures only a few risk elements and represents a bank’s past-year performance. Besides, RBI is of the view, the present rating does not capture the risks that could cause a bank to fail.

According to sources, some of the broader risks, such as credit risk, operational risk, and strategic and business group risk, increase the probability of a bank’s failure.

In addition, the process of annual financial inspection has been expedited and it is now proposed that banks should address the areas of concern mentioned in AFI during a particular year. In a given year, AFI is undertaken for the previous year, and significant delays were noticed last year.

A high-level steering committee for the review of supervisory processes for banks, set up by RBI under the chairmanship of Deputy Governor K C Chakrabarty, has suggested the changes in the supervisory approach. Most of the suggestions have been accepted by the central bank.

The banking regulator is also entering into mutual regulatory cooperation agreements with regulators of other countries to extract information about Indian banks operating overseas and vice versa. RBI has already signed an agreement with 14-15 countries and is in talks with the US – a country where a majority of Indian banks have presence. Sources said since the US had three federal banking supervisors, the process might take some time.

The central bank is also planning to create a single-point contact for each bank in order to plug the regulatory lacuna. “It is quite often the case that information about a bank with one department of RBI is not known to other departments. So, a single-point contact will be created for each banks,” a source said.

First Published: Thu, September 13 2012. 00:25 IST