Risk-based Supervision, PCA To Be Stronger

Mumbai, Aug 30 | Updated: Aug 31 2004, 05:30am hrs
The RBI has said that it would continue to strengthen its supervisory initiatives as regulators and regulated entities would have to enhance their risk detection and management systems in order to prepare themselves for the eventual adoption of the new capital adequacy norms under the Basel II process.

Risk-based supervision and the Prompt Corrective Action (PCA) framework would be strengthened further. Consolidated supervision would be completed by a supervisory framework for financial conglomerates, said RBI in its annual report. According to the RBI, the process of financial liberalisation has exposed financial institutions to a wide range of market risks than before. This has necessitated an ongoing restructuring of the regulatory framework, adaptation to the changing landscape of the financial system and a continuous sharpening of the focus of monitoring. Further, recent events have brought issues relating to corporate governance and internal control systems to the centre-stage of the responsibility for the financial stability. It also calls for stakeholders to be watchful.

Also, with a view to ensuring prompt reporting of frauds, a software package for fraud reporting and monitoring system was developed and supplied to all commercial banks.

The RBI has also voiced concern on the fact that a large concentration of credit in few sectors is an indicator of vulnerability since the lending institutions are exposed to the heightened credit risk, especially in the downturn phase of the business cycle.

Data on sector-wise deployment of gross bank credit by 48 major banks showed that the share of food credit declined. The share of credit to the priority sector remained more or less unchanged upto September 2002 before increasingly gradually, reflecting the broadening of the definition of the priority sector over the period. The improvement in the asset quality , in spite of the adoption of the 90-day delinquency norm, is indeed a noteworthy development, said the central bank.