RBI-ON SITE INSPECTION AND OFF-SITE MONITORGING AND

SURVEILIANCE

Presented by:-
1.106-Dhawal N.Bera
2.116-Lalith M.Gurkha
3.140-Leeza V. Ravariya
4.146-Payal U. Shah
5.156-Smit P. Vadera
 INDEX

Introduction
The Core principals for effective supervision
On site Inspection/Examination
Off-site Monitoring
On site Inspection and off site Monitoring in India
Off-Site Monitoring in different countries
OSMOS
 INTRODUCTION
• Central bank occupies a special place of significance in the monetary system of a country. As the
apex authority the central bank regulates and monitors the banking sector and financial
Institutions.

• The role of central Bank as the Regulator of the financial system has acquired immense
significance due to the integration of financial markets under the globalisation.

• Advancements in Technology, Financial Innovation and increased flow of capital across the
borders necessitates continuous monitoring, supervision and surveillance on the part of the central
bank.

• Post liberalisation, financial crises emerged in many countries further strengthened the need for
effective coordination of central banks.

• The bank has prescribed sound guidelines for effective monitoring by the central banks and central
bank have been implementing the guidelines for smooth functioning of the financial system.

• Reserve Bank of India(RBI) is the central bank of India. It was established in the year 1934 under
The Reserve bank of India Act 1934.It performs all the function of regulating, monitoring,
supervision, surveillance and promotional too.
 THE CORE PRINCIPALS FOR EFFECTIVE SUPERVISION
• Core Principals for the
supervisors
1. Responsibilities, objective and powers 1. Supervisory Approach
2.Independence, Accountability, Resourcing 2.Supervisory Techniques and Tools
and legal protection for supervisors
3.Supervisory Reporting
3.Cooperation and collaboration 4.Corrective and Sanctioning powers of
4.Permissible Activities Supervisors
5.Licensing Criteria 5.Consolidated Supervision
6.Transfer of significant ownership 6.Home-Host Relationship
7. Major Acquisitions
Core principles for banker
14. Corporate Governance
14. Interest rate risk in the banking books

15. Risk Management process

15. Liquidity risk

16. Capital Adequacy

16. Operational risk

17. Credit Risk

17. Internal control and audit

18. Problem assets, provisions and reserves

18. Financial reporting and external audit

19. Concentration risk and large exposure

19. Disclosure and transparency
limits 20. Abuse of financial service
20. Transactions with related parties
21. Country and transfer risks
22. Market risk
ON-SITE INSPECTION/EXAMINATION
• On-site Inspection refers to inspection of the bank by the staff of the supervisor or by the
external auditors appointed by the supervisor.

• The information provided by the bank is verified and reports are submitted to the concerned
authority.

• Based on the inspection report and reports given by the banks, remedial actions if necessary are
taken by the authorities.

• On site inspection helps supervisor to verify various issues, assesses the situation and initiate
corrective measures if necessary. some of the issues are:

Compliance of the bank with rules and regulation

Competency and efficiency of the bank
Risk management and accounting standards
Internal check and balance
Overall management of the bank
Accuracy of periodical reports submitted to the supervisor
Quality of credit provided, provision for the NPAs, etc.
OFF-SITE MONITORING
•Off site monitoring helps the supervisor to monitor the bank in the intervening period between two on
site-inspections.
•This helps the central bank to detect any problem with the working of the bank and take prompt action
•Supervisor analyse the reports of the bank provided by it and the reports of the on-site inspection
team.
•It also collects information on its own and checks whether norms are followed. The supervisor does
this exercise for the entire banking system.
•Inspection and monitoring also involves reviewing the non-banking activities of the bank along with
banking activities as both impact each other.
•The supervisor also clearly indicates the norms to be followed for the both banking and non-banking
activities.
ON-SITE INSPECTION AND OFF-SITE MONITORING IN INDIA

• The Reserve bank of India, the apex bank is the supervisor of the banking system in India, is
empowered by the Banking regulations act of 1934 to use both on-site inspection and off-site
monitoring for proper supervision.

• RBI earlier followed the transaction approach for supervision, later considering the trends in
banking switched over to Risk Based Supervision(RBS).

• RBI developed an inspection manual in 1998 for on site inspection for both inspection staff and
the banks. Instructions is given to the banks regarding risk control system and electronic records
to be maintained by them for inspection.

• Similarly, Inspectors of the RBI is introduced to CAMELS model i.e. Capital Adequacy, Asset
Quality, Management, Earnings, Appraisal, Liquidity and System & Controls to asses a Bank.

• On-site inspection is also applicable to non-banking institutions. While NABARD inspects RRBs,
state and central cooperative banks, the National Housing Bank supervises housing finance
companies etc. also based on the CAMELS approach.
OFF-SITE MONITORING IN INDIA
• Off site monitoring helps the central bank to assess the financial soundness of banks between two on-site
inspection.

• The setting up of Board for Financial Supervision (BFS) and the process initiated by RBI in 1995 for off-
site monitoring strengthened the supervisory role of the central bank.

• The inspection and monitoring enables the central bank to rate the institution based on CAMELS model.

• Parameters from this model are ranked on a scale of 1 to 5 and overall rating is obtained. Overall rating is
done on a five score scale of A to E. The five rating indicate the following:

A- Basically sound in every respect

B- Fundamentally sound but moderate weakness
C- Has weakness related to financial, operational or compliance
D- Has serious weakness that can affect future viability
E- Has very serious financial weakness leading to failure
• The off-site monitoring and surveillance system helps the central bank to identify weakness of institutions
and is used as EWS.
OFF-SITE MONITORING IN DIFFERENT COUNTRIES

• Off site monitoring followed by various countries differ from each other depending upon their
priorities and stage of development.

• Sample of the methodology used by some countries is as follows:

1. USA-The federal Reserve system depends on a strong on-site supervision. The national banks
are supervised by the Board of Governor of Federal Reserve. Other banks are supervised by
the federal Deposit Insurance Cooperation and Office of the Comptroller of Currency. Banks
submits the various detailed reports based on which a comprehensive reports namely
‘Uniform Bank Performance Report is prepared by the Federal Reserve.

2. UK- In UK, the on-site supervision is entrusted to accounting firm called ‘Reporting
Accountant’ specialising in banks audits and off-site monitoring is entrusted to the Financial
Service Authority (FSA).Similar to the other countries, here also banks are required to submit
reports to prepare the final report on the overall performance of the bank
3. HONG KONG- Off-site monitoring is widely used in Hong Kong to monitor and asses the
performance of the banks. The Hong Kong Monetary Authority(HKMA) is the main
monetary authority. Banks have to submit monthly or quarterly returns covering various
aspects like profit and loss, assets and liabilities, Market risk, etc. along with the
compliance certificate related to statutory requirements.
4. SINGAPORE- In Singapore bank has to submit various report to The monetary Authority of
Singapore(MAS) at regular intervals for off-site monitoring. After the detailed analyses by
the off-site monitoring experts the report is submitted to the on-site inspection team
according to which they inspect the bank.
5. FRANCE- Commission Bancaire is the French Banking Commission which supervise the
banking system in France. Prudential guidelines cover five criteria namely minimum capital
and reserves, Capital adequacy ratio, solvency ratio, liquidity and large exposure ratio. Bank
have to submit quarterly returns on prudential ratios and balance sheet and half yearly
returns on capital adequacy ratio solvency ratio. Banks have to submit two reports relating
to internal control containing all details of internal control.
COMPUTERISED OFF-SITE MONITORING AND SURVEILLANCE

• The computerised off-site monitoring and surveillance system known as OSMOS was introduced
by the RBI in year 1995 and became fully operational by 1997.

• Under the off-site prudential supervisory reporting system, banks have to submit returns at
regular intervals to the Supervision Department. These returns came to be called ‘DBS’ returns.

• Initially banks were required to submit seven returns, five of which were common to Indian
banks and foreign bank. They are 1)Return on asset liabilities and Exposures, 2)Return on
capital adequacy, 3)Return on operating results 4) Return on assets quality and 5)Return on
large credits.

• Indians bank have to submit two additional returns namely return on connected lending and
report on ownership and control.

• Interaction with the banks and gathering information has become easier thanks to technology
driven system. There is no need to visit the bank often. Technology enables them to access data
and analyses then from anywhere. This saves time, effort and resources.
 CONCLUSION

• On-site inspection and off-site monitoring and surveillance are prescribed for effective
supervision.

• On-site inspection is done annually by the supervisor by visiting the bank. Off-site Monitoring
supplements on-site Inspection.

• This helps Central bank to detect any problem with the working of the bank and take prompt
action.

• Advancements in technology has contributed significantly in making supervision more effective.

• Effective supervision helps to detect any flaws in financial system and avoids any financial crisis.
Thank YOU