October 19, 2004
All Commercial Banks
(excluding RRBs)
Dear Sir,
Enhancement of transparency on bank’s affairs
through disclosures
The Reserve Bank has been taking several steps
from time to time to enhance the transparency of banks by having comprehensive
requirements for disclosure in tune with the best practices. The disclosure
requirements are being reviewed and revised from time to time.
Background
2. The Joint Parliamentary Committee (JPC)
on Stock Market Scam and Matters Relating Thereto in their report (December
2002) had recommended that the comments made by Reserve Bank in the inspection
reports should be published in the Annual Reports of the banks along with the
financial results, to ensure greater transparency, so that shareholders get
a better idea about the operations of the bank. In view of the sensitive nature
of the disclosures and their impact on the interest of depositors, the JPC recommendations
were examined by the Reserve Bank in consultation with the Standing Technical
Advisory Committee on Financial Regulation (STACFR) and the Board for Financial
Supervision (BFS). In this regard, the Reserve Bank also took into account the
recommendations of Committee on Banking Sector Reforms (1998), Advisory Group
on Transparency in Monetary and Financial Practices (2000) and Committee on
Procedures and Performance Audit on Public Services (2004).
Best Practices
3. It is noteworthy that the third pillar
of the Basel II addresses how safety and soundness in the banking system can
be strengthened by market discipline through enhanced transparency in bank’s
disclosures to the public. It is also internationally recognized that, while
transparency strengthens market discipline, due to the inherent need to preserve
confidentiality in relation to its customers, banks may not be able to disclose
all data that may be relevant to assess its risk profile. In this light, while
mandatory disclosures include certain prudential parameters such as capital
adequacy, level of NPAs etc., the supervisors, themselves may not disclose all
or some information obtained on-site or off-site. In many countries, there is
automatic and non-discretionary public disclosures of penalties imposed for
violation of any regulation. In some countries, wherever there are supervisory
concerns, "prompt corrective action" programmes are normally put in
place, which may or may not be publicly disclosed. Circumspection in disclosures
by the supervisors arises from the potential market reaction that it might trigger,
which may not be desirable. Thus, in any policy of transparency, there is a
need to build processes which ensure that the benefits of supervisory disclosure
are appropriately weighed against the risk to all stakeholders of non-disclosure
in each instance.
4. On balance, while there could be considerable
risks and judgments involved in the disclosure of information obtained by the
supervisor, there is significant merit in adopting a policy of transparency
in regard to statutory penalties levied and other specific supervisory actions.
Disclosure of penalties imposed by RBI
5. At present, Reserve Bank is empowered
to impose penalties on a commercial bank under the provision of Section 46 (4)
of the Banking Regulation Act, 1949, for contraventions of any of the provisions
of the Act or non-compliance with any other requirements of the Banking Regulation
Act, 1949; order, rule or condition specified by Reserve Bank under the Act.
The imposition of penalty on a bank is decided after a due process of advising
the bank and seeking its explanation so as to afford a reasonable opportunity
to the bank for being heard. Considering the above and consistent with the international
best practices in disclosure of penalties imposed by the regulator, it has been
decided that disclosure of the details of the levy of penalty on a bank in public
domain will be in the interests of the investors and depositors.
Disclosure of actions taken on the basis of
inspection reports or other adverse findings
6. It has also been decided that strictures
or directions on the basis of inspection reports or other adverse findings should
be placed in the public domain.
Mode of disclosure for penalties
7. The mode of disclosures of penalties, imposed
by Reserve Bank will be as follows:
a) A Press Release will be issued by the Reserve
Bank giving details of the circumstances under which the penalty is imposed
on the bank alongwith the communication on
the imposition of penalty in public domain.
b) The penalty should also be disclosed
in the "Notes on Accounts" to the balance sheet in the concerned
bank’s next Annual Report.
c) In the case of foreign banks, the penalty
should be disclosed in the "Notes on Accounts" to the next balance
sheet for the Indian operations of the concerned foreign banks.
Mode of disclosure of other actions
8. With regard to strictures or directions
by the Reserve Bank, there would be a press release by the Reserve Bank, which
would be confined to disclosure of the stricture or the direction only.
Effective date
9. The above policy will come into operation
with effect from November 1, 2004.
Yours faithfully,
(C.R. Muralidharan)
Chief General Manager-in-Charge