The Bank has continued with the post-liberalisation strategy of setting prudential norms based on international best practices within which banks are left free to operate. The compliance of the Bank with the Basel Committee's Core Principles on Banking Supervision was gone into in great detail and the gaps in supervision were addressed by setting up seven in-house groups to make necessary recommendations. The reports of these groups were discussed by the BFS in a specially convened session and the agenda set for action to be taken to bridge the gaps. Since then, the compliance is being monitored on a regular basis. The BFS also authorised the release in the public domain of the assessment of compliance, and this document is being shared with overseas supervisory agencies and international financial institutions. The IMF also completed an assessment using the revised methodology of the Core Principles which was in line with the Bank's own assessment.

RBI's efforts in this area have been well recognised in international forums and in August 1999, it was made a Member of the Core Principles Liaison Group (CPLG) of the Basel Committee for Banking Supervision, which has been set up to promote the implementation of the Core Principles world-wide. RBI has also examined the proposed New Capital Adequacy Framework currently under discussion by the BCBS, and has communicated its response to the Basel Committee. RBI is also represented on the Working Group of Capital of the Core Principles Liaison Group, which has been constituted to obtain the inputs of the non G-10 countries in the international standard setting exercise.

One of the major changes brought about in the supervisory functioning is to introduce a consultative process with banks preceding the introduction of major measures. The guidelines on Asset-Liability Management (ALM) and on comprehensive Risk Management Systems have been finalised in 1999 on the basis of feedback received from banks and the banks advised to implement the guidelines. The supervisory focus in the coming years will be to monitor the progress of implementation of these systems and to ensure their full coverage. Consultative process has also been followed while introducing the guidelines for investment in non-SLR securities and review of reporting system covering overseas branches of Indian banks.

A risk based supervisory regime as a means of more efficient allocation of supervisory resources is also being considered. The risk based supervision project, which is being guided by international consultants with the assistance of Department for International Development (UK), would lead to prioritisation of selection and determining of frequency and length of supervisory cycle, targeted appraisals, and allocation of supervisory resources in accordance with the risk perception of the supervised institutions. The Risk Based Approach will also facilitate the implementation of the supervisory review pillar of the proposed New Capital Accord, which requires that national supervisors set capital ratios for banks based on their risk profile.

To guard against regulatory forbearance and to ensure that regulatory intervention is consistent across institutions and is in keeping with the extent of the problem, a framework for Prompt Corrective Action has been developed. The PCA framework, which will link regulatory action to quantitative measures of performance, compliance and solvency such as CRAR, NPA levels and profitability, has been circulated for discussion and suggestions to a wider audience of banks and interested public, and would now be considered by the BFS before being implemented.

An approach of consolidated supervision that, while leaving the responsibility of supervision of bank subsidiaries to their respective regulators, will allow bank supervisors to obtain a consolidated view of the operations of bank groups has been approved. This will also require greater coordination between the different supervisors in the financial sector. Quarterly reporting by parent banks on key areas of functioning of subsidiaries has been introduced from the quarter ending September 2000. The banks are now being required to annex the financial statements of their subsidiaries along with their annual accounts. A Working Group has been set up to look into the introduction of consolidated accounting and it would submit its report by May 2001. Thus, the components of this diversified approach are being gradually put in place

With the increasing reliance upon off-site reporting as an instrument of supervision, upgradation of systems has been a focus area of the BFS and this focus will continue in the future. The project under way to move the surveillance database to RDBMS with a data-warehousing component will provide line supervisors the ability to closely monitor banks and detect vulnerabilities in the system at an incipient stage.

The skill-set required by supervisors has changed radically over the past few years. With the introduction of technology and new products and the move towards risk-based supervision, the demands on supervision have also increased. Thus, meeting the training needs of supervisors in this changing environment will be a priority area and will be monitored continuously.

In the coming years, the RBI will continue to guide the development of supervisory prescriptions and practices along the lines of international best practices based on global standards so as to strengthen both the supervisory regime as well as the Indian banking system.

The compliance of the Bank with the Basel Committee's Core Principles on Banking Supervision was gone into in great detail and the gaps in supervision were addressed by setting up seven in-house groups to make necessary recommendations. The reports of these groups were discussed by the BFS in a specially convened session and the agenda set for action to be taken to bridge the gaps. Since then, the compliance is being monitored on a regular basis. The BFS also authorised the release in the public domain of the assessment of compliance, and this document is being shared with overseas supervisory agencies and international financial institutions. The IMF also completed an assessment using the revised methodology of the Core Principles which was in line with the Bank's own assessment.

RBI's efforts in this area have been well recognised in international forums and in August 1999, it was made a Member of the Core Principles Liaison Group (CPLG) of the Basel Committee for Banking Supervision, which has been set up to promote the implementation of the Core Principles world-wide. RBI has also examined the proposed New Capital Adequacy Framework currently under discussion by the BCBS, and has communicated its response to the Basel Committee. RBI is also represented on the Working Group of Capital of the Core Principles Liaison Group, which has been constituted to obtain the inputs of the non G-10 countries in the international standard setting exercise.