Before onset of banking reforms the focus of the statutory regulation of commercial banks bt RBI was on solvency issues and restricted to guidelines/directives on matters like licensing, administration of minimum capital requirements, pricing of services including administration of interest rates on deposits as well as credit, reserves and liquid asset requirements. The Banking sector reforms inIndia synchornized with the implementation of BIS Prudential Norms (1988) in 1992-93

After introdicinga series of reforms pursuant to Narasimham committee recommendations, the need was felt imperative to realign supervisory and regulatory standards almost on a par with international best practices and also reflecting the new environment of banking India. At the same time, it was also felt that special care needed to be kept in of view the distinct socio-economic conditions of the country, the business practices, payment systems prevalent in the country and the predominantly agrarian nature of the economy, and ensured that the prudential norms were applied over the period and across different segments of the financial sector in a phased manner

The restructured supervisory mechanism was evolved in 1994 under the directions of a newly constituted (also inNovember 1994) Board for Financial Supervision (BFS), which functions under the aegis of the RBI, to suit the demanding needs of a strong and stable financial system. The supervisory jurisdiction of the BFS now extends to the entire financial system barring the capital market institutions and the insurance sector.

1. Periodical on-site inspections, and the targeted appraisals by the Reserve Bank

2. A process of rating of banks on the basis of CAMELS in respect of Indian banks

3. Off-site surveillance which particularly focuses on the risk profile of the supervised institution. The Off-site Monitoring and Surveillance System (OSMOS) was introduced in 1995 as an additional tool for supervision of commercial banks to supplement the on-site examinations. The system consists of 12 returns (called DSB returns) focussing on supervisory concerns such as capital adequacy, asset quality, large credits and concentrations, connected lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks).

4. CACS (Capital, Asset Quality, Compliance and Systems & Control) in respect of foreign banks that has been put in place from 1999.

The supervisory intervention by the RBI is normally triggered by the deterioration in the level of capital adequacy, NPAs, credit concentration, lower earnings, and larger incidence of frauds which reflect the quality of control.

RBI has issued a comprehensive Notification on the Supervisory System for Financial Institutions including the functins of of the Board for Financial Supervision covering comprehensive information on the subject. The data in the report is covered in the following Pages.