RBI sets stage for a bank supervision overhaul

http://www.business-standard.com/india/news/rbi-sets-stage-forbank-supervision-overhaul/486292/

The Reserve Bank of India (RBI) has decided to change the way it monitors and supervises banks in order to make the process more forward-looking. The move comes against the backdrop of the risks that have emerged after the global financial crisis of 2008, with lenders shifting from offering traditional products to more complex ones.

The country’s financial sector would now be evaluated under a dynamic risk-based mechanism, an aspect the present CAMELS rating system lacked, central banking sources said. RBI proposes to replace CAMELS with INROADS (Indian Risk-Oriented and Dynamic Rating System) from the next round of annual financial inspection, in 2013.

At present, the central bank uses the CAMELS (Capital adequacy, Asset quality, Management, earnings, Liquidity, and Systems and control) method, to assign ratings to Indian banks. CAMELS, which goes from A+ to D is assigned to a bank while finalising the annual financial inspection (AFI) report.

RBI has argued that the present form of rating captures only a few risk elements and represents a bank’s past-year performance. Besides, RBI is of the view, the present rating does not capture the risks that could cause a bank to fail.

According to sources, some of the broader risks, such as credit risk, operational risk, and strategic and business group risk, increase the probability of a bank’s failure.

In addition, the process of annual financial inspection has been expedited and it is now proposed that banks should address the areas of concern mentioned in AFI during a particular year. In a given year, AFI is undertaken for the previous year, and significant delays were noticed last year.