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RBI to introduce risk-based supervision for banks

Reserve Bank of India will introduce risk-based supervision for banks in phases and put in place a prompt corrective action mechanism when banks breach certain specified trigger points of capital adequacy, return on assets and non-performing assets.

The PCA would be introduced by the end of this financial year and penalties for breaching norms could be stiff like removal of chairman, board of directors and liquidation of banking entities, RBI deputy governor G P Muniappan told reporters on the sidelines of a banking seminar, organised by Federation of Indian Chambers of Commerce and Industry on 'Indian banking: global benchmarks' in Mumbai on Wednesday.

Before launching the scheme, "we will conduct the assessment of impact based on previous data of few banks," the deputy governor said.

A RBI group is addressing the transitional and management issues to ensure a smooth switchover to RBS, based on the recommendations of PricewaterhouseCoopers of London, he said.

The RBS model consists of development of a risk profile and designing a customary supervisory action plan for each bank, delineating the scope and extent of supervision to target high-risk areas and strengthening quality assurance and enforcement functions to maintain objectivity and neutrality in application of supervisory standards, he said.

On banks turning into universal banking entities, Muniappan said such banks cannot become the order of the day as many issues like protection to investors and swap ratios have to be dealt with.

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