In order to make supervisory process for commercial banks more effective,a Reserve Bank of India panel has proposed that risk-based supervision (RBS) should replace compliance-based and transaction-testing approach (CAMELS).
Under RBS,the supervisory rating would be a reflection on the risk elements and would not be an exercise in performance evaluation as under the CAMELS.
Under RBS,the supervisory stance would be determined based on a supervisory analysis of probability of failure of a bank and the likely impact of its failure on the banking/financial system.
Thus,the periodicity/intensity of on-site inspection of a bank would depend upon its position on the Risk-Impact Index Matrix rather than its volume of business.
Based on the exercise,the bank would then be appraised of the direction of key risk groups along with overall risk faced by it. A risk mitigation plan,comprising the need for improving controls,augmenting capital or restructuring business would also be given to the bank.
The RBIs High Level Steering Committee (HLSC) for Review of Supervisory Processes for Commercial Banks was constituted by the RBI Governor on August 3,2011. The HLSC was chaired by KC Chakrabarty,deputy governor of RBI.
The panel said that the supervision of all group entities under the jurisdiction of RBI has to be brought under a single department as against the present fragmented set up.
The domains of regulation and supervision should be firmly demarcated and any entity-specific decision should only emanate from the supervisory department, it said.
The communication between the supervisor and the supervised entity is confidential and,therefore,should not be subject to any public scrutiny,the panel said.