Changes made by RBI in both the method and approach of monitoring

- Earlier RBI was focusing only on banks, now focus on all financial intermediaries as well

RBI has increased supervision of banks and financial institutions and tightened the entire system. It is a continuous process. RBI has changed both the method and approach of monitoring. The matter is not limited to statistics alone, the RBI is now also looking into the business nature of banks and reprimanding banks if necessary. Not only this, RBI is also taking banks into confidence. Reserve Bank Governor Shaktikanta Das said this process is based on 'consultation'.

A few things have become clear. RBI always issues circulars almost daily to weed out disreputable bankers. But not so now. RBI is taking great care. Earlier, when a bank earned high interest income from customers and showed its balance sheet free of non-performing assets (NPAs), the Reserve Bank appreciated it. This is not happening now, RBI has become alert and is coming to a conclusion only after examining all the data.

The purpose of monitoring is to protect depositors and consumers, stabilize the financial sector and ensure availability of funds for economic growth. RBI has not changed the target of monitoring but it has certainly changed its methodology. Earlier, in most cases, RBI representatives used to visit banks to assess the situation. This changed five years ago and now there is more analysis of data from different sources. In a way, the monitoring process has become balanced. The Reserve Bank is paying more attention to cross-checking data for different periods.

Along with this, the process of visiting banks and financial institutions by representatives of the banking regulator is also underway to look into sensitive topics. Earlier, RBI used to conduct transaction testing of loan accounts but after the creation of new monitoring framework, the scope of its transaction testing reduced. The Spark framework became focused on risk-based assessment or RBS.

RBS is a complex model. In the first phase of its launch, 28 banks were brought into its fold from FY2013. This includes a comprehensive review of current and future risks faced by banks. This helped the central bank to take necessary steps in time.

After the advent of RBS, the CAMELs (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Systems and Controls) systems became obsolete. This system was compliance oriented and focused more on transaction testing. Under this system, banks were divided into two groups - Indian and foreign. This classification has changed in RBS. Banks are now classified into groups based on their structure, nature of business and risks.

RBI is mostly focusing on RBI on-site inspection. This trend has changed in the last few years. With the shift from on-site to off-site monitoring, transaction testing has become more subjective and sample-based. This process continues throughout the year.

The new monitoring trend is based on the Central Repository of Information on Large Credits established in 2014. Before the Central Repository of Information on Large Credits, bad loan data was not available in one place. After this framework is prepared, banks provide information related to loans of Rs 5 crore or more per month. Data for NPA loans is provided on a weekly basis.

Keeping in view the possibility of loan accounts turning into NPAs, banks need to classify loans at various levels into Special Mention Accounts. RBI and banks (but not rating agencies) can access this data. This helps the banking system to access payment records of individual borrowers.

So far, regulatory initiatives have been outcome-based. RBI used to take action only when the issue of bad loans came up. But now the banking regulator has started looking at the symptoms from the beginning and getting to the root cause of the problem. Now the consistency in the monitoring system has also increased. Earlier RBI focused only on banks and paid little attention to non-banking financial companies. Most of the urban co-operative banks were not under the purview of RBI. But now RBI is also focusing on all financial intermediaries. In short, the entire structure of the monitoring system has changed from unit based to activity based.