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`RBI should work with SEBI, IRDA to supervise banks'

Our Bureau

MUMBAI, June 6

THE advisory group on banking supervision has recommended that the Reserve Bank of India (RBI) should consider formalised co-ordination between different regulatory agencies.

The recommendation is in line with the ``Reddy formula'' that had envisaged a super regulator comprising the heads of the three main regulators -- RBI, SEBI and IRDA.

The advisory group -- set up by the Standing Committee on International Financial Standards and Codes, headed by the RBI Deputy Governor, Dr Y.V. Reddy -- released Part II of its report on banking supervision on Wednesday.

The group found that though the level of compliance in the Indian banking sector with the standards and codes of the Basle Committee is of a high order, changes were needed in areas such as corporate governance, internal control and risk management.

The committee felt the quality of corporate governance should be same in all banks, irrespective of ownership. The process of induction of directors into bank boards and their initial orientation should be streamlined.

A provision on the lines of Section 20 of the Banking Regulation Act, 1949, which prohibits loans and advances to directors and their connected parties will have to be made in respect of large shareholders also. Information on transactions with affiliate d and related parties should be disclosed.

The committee is of the view that there is some overlap in the role of the RBI as owner and as regulator which should be curbed.

Other recommendations include that the RBI may consider issuing suitable detailed instructions requiring banks to have mechanisms in place for continually assessing the strength of guarantee and appraising the worth of collateral.

Banks should be instructed to monitor the total amount of loans to connected and related parties and introduce an independent credit administration process. Limits on aggregate exposures to connected and related parties by a bank need to be established.

Advance risk management capabilities must be in place in all banks by the end of FY 2002-03. RBI may assist banks in hastening introduction of the more scientific and sophisticated risk management systems, the report states.

Banks should be required to include a statement on their risk management policies and procedures in their publicly available documents.

As per extant guidelines, if a loan under the doubtful category does not migrate to the loss category (for which 100 per cent provision is required to be made) the account remained under-provided as, after three years in the doubtful category only a maxi mum of 50 per cent provision is created on the secured portion.

This loophole needs to be plugged in view of the limitations with which realisation of collateral suffers in the country, according to the report.

The levels of disclosure in the balance sheets of Indian banks should be improved so that within the period of next two to three years, these meet the international standards. A co-ordinated approach between the ICAI and RBI may be adopted for this purpo se.

Urgent attention would be needed to develop suitable mechanisms in order to detect and provide for situations of double gearing and other similar problems related to supervision of financial conglomerates.

The report has also suggested, that for supervision of subsidiaries of foreign banks, having branches in India, as well as subsidiaries of Indian banks abroad, RBI would need to develop a more proactive and focussed policy.