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Regulation & Supervision of Banks

Regulation & Supervision of Banks. Shri M R Das DGM. Difference between regulation and supervision. Objectives of Regulation and Supervision. To protect interests of depositors of banks To ensure orderly development and conduct of banking operations To ensure liquidity and solvency of banks

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Regulation & Supervision of Banks

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  1. Regulation & Supervision of Banks Shri M R Das DGM

  2. Difference between regulation and supervision

  3. Objectives of Regulation and Supervision • To protect interests of depositors of banks • To ensure orderly development and conduct of banking operations • To ensure liquidity and solvency of banks • To secure and ensure compliance with various provisions, directions, policies etc. • To prevent any systemic crisis through preventive and corrective measures.

  4. Regulatory Functions • Legal Framework • RBI Act, 1934 • BR Act, 1949 • State Bank of India (SBI) Act, 1955, SBI (Subsidiary Banks) Act, 1959 and Banking Companies (Acquisition and Transfer of Undertakings) Act 1970/1980.

  5. RBI’s control over management of banks • Provisions of BR Act 1949 -- u/s 10 A (2) – Constitution of the Board of Directors -- u/s 10 (B) – Appointment of Chairman -- u/s 12 – Voting rights -- u/s 36 (A) - Powers to remove managerial and other persons

  6. Control over operations of banks • u/s 8 • u/s 9 – Holding of immovable property • u/s 19 (2) – Holding shares of any company • u/s 20, 20 A • u/s 21 • u/s 35 A

  7. Amalgamation, reconstruction, liquidation • u/s 36 AE – Power to acquire undertakings of banking company (36 AF, AG) • u/s 38 – Winding up of a Banking Co. • u/s 44 (1) – Voluntary winding up • u/s 44 A – Voluntary amalgamation of banking co. • u/s 45 – Compulsory amalgamation

  8. Organisation of Regulatory and Supervisory Functions • 1993 – DOS carved out of DBOD – objective to separate the supervisory role from the regulatory function of RBI • 1994 – BFS Constituted based on the recommendation of the Committee on Financial System • 1997 – DOS divided into DBS and DNBS

  9. Salient features of the Regulatory norms • Licensing of Banks • Opening of New Private Sector and Foreign Banks • Minimum paid-up capital and reserves • Cash Reserve and Liquidity Reserve Requirement • Priority Sector Advances • Interest Rates • Connected Lendings • Prudential Norms – Capital Adequacy, IRAC norms, Classification and Valuation of Investments, Disclosure Standards, Exposure norms, etc.

  10. Regulatory & Supervisory architecture of RBI that helped limit the contagion effects of the financial crisis • Calibrated approach to financial sector reforms • Limited exposure of banking system to synthetic and complex structured products • Maintenance of adequate capital and liquidity • Containment of Exposure to sensitive sector • Disallowance on upfront booking of profit on securitization process

  11. RBI actions for containment of various risks • Systemic Risk: Restricted access to non-collateralised borrowing and lending in the money markets • Contagion Risk: Imposition of limits on inter-bank limits • Risks from Systemically Important Non-Deposit taking Non-Banking Entities: These institutions were brought under the purview of prudential regulation

  12. Various other measures • Well calibrated approach towards introduction of new financial products. At least one party to any transaction in OTC derivatives markets required to be under regulatory jurisdiction of RBI. • Comprehensive self-assessment of India’s financial sector focused on stability, resilience to stress and compliance with international standards and codes • Risk weights and provisioning requirements for certain categories of exposures ensured flow of credit to these sectors consistent with the phases of economic cycles

  13. Systemic Stability Focus • RBI instituted Financial Stability Unit in the Bankwith the remit to conduct macro prudential surveillance of the financial system on an on-going basis • Financial Stability Report will be published twice a year. First report was released in March 2010. More frequent assessments will be reported to top management of the bank.

  14. Regulatory Initiatives • New Capital Adequacy Framework • Prudential Norms: • Countercyclical Capital Adequacy and Provisioning Norms • Modification of Prudential Norms for Projects under implementation • Modification to Prudential Norms Governing Bank’s Exposure to Infrastructure Sector • Definition of Commercial Real Estate Exposure

  15. Contd. • IFRS Implementation in Indian Banks • Compensation Practices • Base Rate System • Know Your Customer/ Anti-Money Laundering Measures • Branch Authorization • Foreign Bank Entry • New Bank License • Credit Information Companies

  16. Supervisory Initiatives • Implementation of Supervisory Review and Evaluation Process • Frauds Monitoring Mechanism • Off-site Monitoring and Surveillance Framework • Customer Service • Outreach Activities Carried out by Banking Ombudsman • Code of Bank’s Commitment to Customers

  17. Thank You

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