The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and
supervise commercial banks. These powers are exercised through on-site inspection
and off site surveillance.
Till 1993, regulatory as well as supervisory functions over commercial banks were
performed by the Department of Banking Operations and Development (DBOD). Subsequently,
a new Department of Banking Supervision (DBS) was set up to take over the supervisory
functions relating to the commercial banks from DBOD. For dedicated and integrated
supervision over all credit institutions, i.e., banks, development financial institutions
and non-banking financial companies, the Board for Financial Supervision (BFS) was
set up in November 1994 under the aegis of the Reserve Bank of India. For focussed
attention in the area of supervision over non-banking finance companies, Department
of Supervision was further bifurcated in August 1997 into Department of Banking
Supervision (DBS) and Department of Non-Banking Supervision (DNBS). These Departments
now look after supervision over commercial banks & development financial institutions
and non-banking financial companies, respectively. Both these departments now function
under the direction of the Board for Financial Supervision (BFS).
The Board for Financial Supervision constituted an audit sub-committee in January
1995 with the Vice-Chairman of the Board as its Chairman and two non-official members
of BFS as members. The sub-committee’s main focus is upgradation of the quality
of the statutory audit and concurrent / internal audit functions in banks and development
On site Inspection
On site inspection of banks is carried out on an annual basis. Besides the head
office and controlling offices, certain specified branches are covered under inspection
so as to ensure a minimum coverage of advances.
The Annual Financial Inspection (AFI) focusses on statutorily mandated areas of
solvency, liquidity and operational health of the bank. It is based on internationally
adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality, management,
earning, liquidity and system and control. While the compliance to the inspection
findings is followed up in the usual course, the top management of the Reserve Bank
addresses supervisory letters to the top management of the banks highlighting the
major areas of supervisory concern that need immediate rectification, holds supervisory
discussions and draws up an action plan, that can be monitored. All these are followed
up vigorously. Indian commercial banks are rated as per supervisory rating model
approved by the BFS which is based on ‘ CAMELS ‘ concept.
As part of the new supervisory strategy, a focussed off-site surveillance function
was initiated in 1995 for domestic operations of banks. The primary objective of
the off site surveillance is to monitor the financial health of banks between two
on-site inspections, identifying banks which show financial deterioration and would
be a source for supervisory concerns. This acts as a trigger for timely remedial
During December 1995 first tranche of off-site returns was introduced with five
quarterly returns for all commercial banks operating in India and two half yearly
returns one each on connected and related lending and profile of ownership, control
and management for domestic banks. The second tranche of four quarterly returns
for monitoring asset-liability management covering liquidity and interest rate risk
for domestic currency and foreign currencies were introduced since June, 1999. The
Reserve Bank intends to reduce this periodicity with effect from April 1,2000.
With a view to strengthening the corporate governance and internal control function
in the banks, several steps have been initiated. Introduction of concurrent audit
system, constitution of independent audit committee of board, appointment of RBI
nominees on boards of banks, creation of a post of compliance officer, such are
some steps. Besides, the Reserve Bank monitors the implementation of recommendations
of Jilani Committee relating to internal control systems in banks on an on-going
basis during the annual financial inspection of banks.
Initiatives and Directions
The Reserve Bank has taken several other supervisory policy initiatives. These include
quarterly monitoring visits to banks displaying financial and systemic weaknesses,
appointment of monitoring officers and direct monitoring of certain problem areas
in house-keeping, etc. In addition the department provides secretarial support to
the Board for Financial Supervision and acts as its executive arm. It is the BFS
which evolves policies relating to supervision. It also attends to appointment of
statutory central auditors / branch auditors for all banks and selected all India
financial institutions and to complaints against banks. The department monitors
cases of frauds perpetrated in banks and reported to it. The department as a one
time measure, issued several guidelines to banks and all india financial institutions
to enable them to become Y2K compliant.
Against the backdrop of banking sector reforms in India and the global focus on
internal control and supervisory mechanism, the need for building a strong and efficient
banking system comparable to the international standards cannot be gainsaid. A detailed
study was carried out so as to ascertain gaps, if any, in implementing the 25 core
principles of effective banking supervision enunciated by the Bank for International
Settlements (BIS). Necessary steps have already been initiated to fill in the gaps,
so as to make the regulatory as well supervisory system more sound and comparable
to international standards.
Supervision over FIs
On the basis of the recommendations made by an in-house group, the monitoring of
the financial institutions first started after 1990. This was done through prescribed
quarterly returns on liabilities / assets, source and deployment of funds, etc.
The objective of this monitoring was to obtain a macro level perspective for evolving
monetary and credit policy, to assess the quality of assets of the financial system
and to improve co-ordination between banks and FIs. In 1994, these institutions
were brought under the prudential regulation of the Reserve Bank.
The Reserve Bank has adopted more or less, the CAMELS approach for regulation of
Fis. Since FIs are vested with developmental role as welland with responsibility
of supervision of other institutions, evaluation of their developmental, co-ordinating
and supervisory role is also undertaken.
The newly created division in the department at present supervises and regulates
ten select all-India financial institutions viz., IDBI, ICICI, IFCI, IIBI, Exim
Bank, NABARD, NHB, SIDBI, IDFC and TFCI. With a view to having a continuous monitoring
and supervision of these FIs, an off-site surveillance system has also been put
Further, the division collects from LIC, GIC and UTI information relating to assets
and liabilities and flow of funds for the purpose of overall assessment of the impact
of the operations of FIs on the total flow of resources in the economy and for compiling
new liquidity and monetary aggregates.