To increase transparency in the banking system, the government and the regulator are considering bringing the risk-based assessment of banks in the public domain.
At present, a risk-based rating of banks done by the Reserve Bank of India is kept confidential due to the sensitive nature of the information. According to people familiar with the development, the issue is being discussed in light of reports that some banks may have exposure to sub-prime and similar risky loans, which is likely to impact the stability of the financial system.
By making the ratings public, the central bank would also be able to enforce better discipline and bring about greater transparency in banking. The move would also help in expediting consolidation in the sector through better pricing of bank securities, these sources said.
The RBI bases ratings on CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk) , which is an internationally recognised system. The RBI conducts its periodical on-site inspections backed by a supplementary off-site monitoring and surveillance system.
Although most of the CAMELS parameters are in the public domain, the weighting given to individual components and the final rating of a bank is not disclosed. ?Weightage is critical to the final score of a bank, which indicates its soundness,? a senior banker said.
The government is also mulling whether to facilitate such risk-based disclosures once a certain length of time has passed following ratings. This delayed disclosure is expected to prevent immediate reaction among depositors and investors if a bank?s portfolio turns adverse.
According to former secretary, economic affairs in the finance ministry, CM Vasudev, ?The trend we are seeing in the financial sector is generally in the direction of greater disclosure. But, it has to be done in a calibrated manner as there is also a risk element involved.? Officials also feel that the regulator will benefit from such public monitoring of banks.
?Making the ratings public will add to the ?hygiene? of the entire banking system,? a banker said, requesting anonymity. The government has already held some discussions on disclosure norms of banks with the Indian Banks? Association. But banking experts point out that disclosing the risk-based ratings can be a tricky issue as the RBI ratings are unlike those given by other independent agencies.
?At present, the CAMELS rating is for the consumptions of a bank?s senior management and the regulator. Making this rating public is a very tricky issue, and has to be decided very cautiously,? an executive director of a bank said, asking not to be named.
Experts have also warned that revealing such information can lead to a ‘run? on a bank as depositors may withdraw their savings fearing that a bank with a very low rating is not a safe bet. The move is significant because it is being made at a time when the banking sector is expected to open up to competition from foreign banks from next year.