OVERVIEW

Supervision – Objectives
Traditional Models – CAMELS
Need for change
Focus on risk management
Risk Based Supervision
BOARD FOR FINANCIAL SUPERVISION

•CONSTITUTION : NOV 16,1994 u/s 58

OF RBI ACT,1934
• ADVISORY COUNCIL TO BFS
• SUPERVISORY JURISDICTION
• MARKET INTELLIGENCE AND
SURVEILLANCE UNIT ( MISU)
• DSB RETURNS w.e.f 01.04.1996
QTLY.
SUPERVISION OF THE INDIAN
FINANCIAL SYSTEM :

• WHY SUPERVISION ?

• WHO SHOULD SUPERVISE ?

• WHO IS THE SUPERVISED ?

SUPERVISION FUNCTION : as per
Sec 22 of BR Act,1949
• PROVIDES INFORMATION

• CONTROL OVER INSTITUTIONS AND

MARKETS

• ASSIST IN MAINTAINING FINANCIAL

STABILITY

• AVOID RECURRENCE OF CRISIS

 Supervision - Objectives
Ensure the stability of the banking system

Protect generally the interests of the depositors

Promote the efficiency of the banking system

Suppress and prevent the use of the system for

illegal or dishonourable purposes
SUPERVISORY PROCESS :
ASPECTS CRUCIAL TO FINANCIAL
SOUNDNESS
• INTERNAL CONTROL
• CREDIT MANAGEMENT
• OVERSEAS BRANCH OPERATIONS
• PROFITABILITY
• COMPLIANCE
• DEVELOPMENTAL ASPECTS
• PROPER VALUATION OF A-L PORTFOLIO
• BANK’S ROLE IN SOCIAL LENDING
• M A P
• SUPERVISORY CYCLE
• P C A
MOVE TOWARDS RBS :

CURRENT APPROACH RBS

UNIFORM TO ALL INSTITUTIONS RISK PROFILING OF BANKS

LARGELY ON-SITE SUPPLEMENTED BY DATA QUALITY AND RELIABILITY OF

OFF-SITE OFF-SITE INSPECTION

WITH REFERENCE TO AUDITED CAN COMMENCE ANYTIME

BALANCE SHEET
FOLLOW UP COMMENCES WITH CONTINUOUS MONITORING
REPORT OF A F I
REGULAR FREQUENCY FOR ALL DEPENDS ON ONGOING
EXCEPT SBI DEVELOPMENTS IN THE BANK
 CAMELS
Capital On-site inspection
Asset Quality Off-site scrutiny
Management Market Intelligence
Earnings Appraisal Statutory Audit
Liquidity Reports
Systems and Control Supervisory Rating
Move to Risk Based Supervision -
Need for change
Liberalisation
Globalisation
New products
Fast communication and Improved
Technology
Balance Sheets in a state of flux
Compounding effect of higher corporate
risks
GENESIS OF RBS

• MONETARY POLICY OF RBI OF 2000-2001

• PILOT BRANCHES IN THREE PHASES UPTO
2005-006
• ASSISTANCE OF INTERNATIONAL
CONSULTANTS TO PREPARE BLUEPRINT
 R B S - Definition

Risk Based Supervision aims at

differentiating banks in accordance with
their risk profiles and induces a flexible
approach in deciding the quantum of
supervisory attention and application of
supervisory tools.
OBJECTIVES OF RBS
• IMPLEMENTATION
OF NEW CAPITAL
ADEQUACY FRAMEWORK
• UTILISATION OF SUPERVISORY RESOURCES
• MINIMISE IMPACT OF CRISIS IN FINANCIAL
SYSTEM
• CONSTRUCTION OF A RISK MATRIX FOR
EACH INSTITUTION
• TO ADDRESS THE COMPOUNDING EFFECT OF
CORPORATE RISK AND EMERGING BASEL II
IMPLEMENTATION
PROCESS OF RBS
•RISK PROFILING OF BANKS BY DRAWING A RISK
ASSESSMENT MATRIX ACROSS BUSINESS RISKS AND
CONTROL RISKS

•EVALUATION OF THE RISK PROFILE IN RELATION

TO BUSINESS STRATEGY AND EXPOSURE

•THE SUPERVISORY RATING : LOW (1) MODERATE(2),

FAIR(3) AND HIGH(4)

•THE SUPERVISORY CYCLE : LOW ( 18-24 MONTHS),

MODERATE (12-18 MONTHS), FAIR (12 MONTHS) AND
HIGH ( 9-12 MONTHS)

•ADOPTION OF RBIA AT EACH BANK’S

SBU’S AND GRADUAL SWITCHOVER
 Supervisory programme
Bank Specific
Scope and objective – based on risk profile

Greater off-site surveillance

Targeted on-site inspections
Structured meetings with banks
Commissioned External audits
Specific supervisory directions
New Policy Notes
 What
TRADITIONAL
is different
RBS in RBS
Predominantly Greater reliance on systems
transaction testing and MIS of the bank
Assessment of financial Assessment of risk in
soundness as on a activities that can affect the
particular date bank in the future
Usually an annual Continuous monitoring –
feature or with fixed not an annual feature
periodicity Risk profile is the
Inspection report supervisory trigger point for
triggers supervisory supervisory initiatives
action Supervisory resources
Same approach to all deployed as per the risks
banks irrespective of perceived – optimisation
their financial position Flexible use of tools
etc.
 Risk Management
Importance of risk awareness,
measurement and mitigation in the
post-reforms scenario
Risk management guidelines of RBI
RISK MANAGEMENT ARCHITECTURE
ALM
GUIDANCE NOTES ON CREDIT RISK AND
MARKET RISK
 Assessment of areas Risk areas under RBS
under camels
C Capital Adequacy Capital Adequacy Appraisal
A Asset Quality Credit Risk
M Management Management Risk
E Earnings Earnings Appraisal
L Liquidity Liquidity Risk
S Systems Internal Controls Risk
Market Risk
Business Strategy and environment
Risk
Operational Risk
Group Risk
Organisation Risk
Compliance Risk
 Business Risks
1) Capital
2) Credit Risk
3) Market Risk
4) Earnings
5) Liquidity Risk
6) Business Strategy and Environment Risk
7) Operational Risk
8) Group Risk
Capital Adequacy Risk of inadequacy of capital / insolvency, poor quality /
Risk composition of capital, ability to raise fresh capital

Credit Risk Loans and advances, investments, off balance sheet

items and country and transfer risk.
Market Risk Interest rate risk, forex risk, commodity / equity price
risk, security/bond price.
Earnings Risk Risk of loss / reduction in earnings, poor quality /
instability / unsustainable swings in the earnings.
Liquidity Risk Risk of mismatch in assets and liabilities, composition of
liabilities.
Business Strategy Risks arising out of incompatible / unsustainable business
and environment strategies and adverse business environment.
Risk

Organisational Risks arising from operations relating to people and

Risk processes, technology, legal and reputation risk
Group Risk Risks arising from operations of group entities – risk of
financial support
 Control Risks
1. Internal controls

2. Organisation

3. Management

4. Compliance
Internal Risks arising out of inadequacy or
Controls Risk ineffectiveness of internal controls, internal
audit, risk management systems, house
keeping and anti money laundering controls.
Organisation Risks arising out of organisational
Risk weaknesses, unclear functional responsibility
of senior personnel – lack of coordination.
Management Risks arising out of management
Risk inadequacies and in cohesiveness.

Compliance Risks arising out of non compliance with the

Risk authorisation criteria, rules, regulations and
other statutory provisions and supervisory
directions.
 Supervisory Risk Rating
Risk Categorisation Risk Rating

Low Risk 1

Moderate Risk 2

Fair Risk 3

High Risk 4
 Supervisory Cycle
Low Risk Banks………………..18 – 24 months

Moderate Risk Banks…………12 - 18 months

Fair Risk Banks………………….12 months

High Risk Banks…………………9 – 12 months

 Bank level Preparations
ALM & Comprehensive Risk Management
Systems
Undertake Risk focused internal audits
Strengthening of MIS
Addressing HRD issues
Setting up of compliance unit
Business Risk Areas
Credit Risk
Market Risk
Liquidity Risk
Operational Risk
Group Risk
 New templates
RISK ASSESSMENT TEMPLATE
ASSESSMENT AREA: CREDIT RISK
Name of the bankRating for Net Credit Risk of the
bank
As per CPOC: As per
bank/ PIO:Low risk/ Moderate risk / High risk/
Very High riskDirection of risk
As per CPOC: As per bank/
PIO:
(Increasing / Decreasing / Stable)
Summary of assessment of Net Credit Risk of the
bankAs per bank/ PIO:
 Analysis
Assessment of inherent Credit RiskMajor components
Max. Risk score Allocated Risk scoreDomestic Sector100
1. Growth and composition of credit risk exposure
(including loans and advances, non-SLR investments,
and exposure to derivative – credit equivalents) 20
2. Credit risk exposure concentration 20
3. Quality of Credit Exposures50
4. Other credit risks- off-balance sheet, country
exposures, etc.10
Other exceptional information Rating for inherent Credit
RiskLow risk/ Moderate risk / High risk/ Very High
riskExpected direction of risk
Stable (  ), Increasing (  ), Decreasing (  )
Significant Information Gap
 Benefits under RBS
For the Supervisor
Optimum use of scarce supervisory
resources in terms of time and people and
cost
Continuous monitoring of banks and hence
problem of not capturing events between
point to point resolved to a great extent
For the Banks
Greater focus on risk management systems
It is incentive compatible
Optimum use of capital relative to risk
LEVEL OF RISK SIGNIFICANCE SUPERVISORY
ATTENTION
Financially sound, well Doesn’t require
capitalized, good asset constant supervisory
LOW
quality ,stable earnings, good attention
controls

Financially sound but Requires moderate

moderate weaknesses in key supervisory attention
MODERATE
areas

Present financial condition Requires

not satisfactory with several considerable
FAIR
weaknesses in key areas supervisory attention

HIGH Basically financially unsound. Requires constant

significant weaknesses in supervisory attention
several areas
BENEFITS OF RBS

INCLUDES MARKET RISK,BUSINESS STRATEGY

RISK,ENVIRONMENT RISK,OPERATIONAL
RISK,GROUP RISK,ORGANISATION RISK AND
COMPLIANCE RISK

AS AGAINST

C A M E L S OR C A L C S MODELS

SIGNIFICANT WEIGHTAGE FOR OPERATIONAL AND

GROUP RISKS