Principle

Indian Position

Remarks

1.0 General Level

1.1 The Basel Committee recommends that banks, in regular financial reporting and other public disclosures, provide timely information, which facilitates market participants’ assessment of banks. It has identified the following six broad categories of information, each of which should be addressed in clear terms and appropriate detail to help achieve a satisfactory level of bank transparency:

• financial performance;
• financial position (including capital, solvency and liquidity);
• risk management strategies and practices;
• risk exposures (including credit risk, market risk, liquidity risk, and operational, legal and other risks);
• accounting policies; and
• basic business, management and corporate governance information.

Banks’ financial reporting broadly encompasses financial performance and financial position (excluding liquidity) and accounting policies. As regards information on basic business management and corporate governance, wide range practices are prevalent from elaborate disclosures to very little information.

All these six broad categories of information should be provided as public information.

1.2 The scope and content of information provided and the level of disaggregation and detail should be commensurate with the size and nature of a bank’s operations. The method of measurement will however depend on applicable accounting standard.

Irrespective of the size and nature of a bank’s operations, the scope and content of information provided tend to be more or less standardised with less disaggregation and detail.

1.3 In countries with less developed financial markets, supervisors may need to establish a more comprehensive supervisory reporting system covering these six broad categories of information to compensate for inadequacies in publicly disclosed information.

This principle is acceptable. The level of compliance in respect of each of the six broad categories is assessed in detail under item 2.0.

2.0 Details in disclosure

2.1 Financial Performance

2.1.1 Information about the performance of a bank, in particular about its profitability, and the variability of those profits over time, is necessary to assess potential changes in financial position and future potential to repay deposits and liabilities, to make distributions to owners, and to contribute to capital growth. Information about profits and losses and their components over recent and earlier periods, helps form assessments of future financial performance and cash flows. It also helps assess the effectiveness with which a bank has employed its resources. Useful information includes basic quantitative indicators of financial performance, breakdowns of income and expenses, and management’s discussion and analysis of financial performance.

RBI is committed to enhance and improve the levels of transparency and disclosure in the annual accounts of banks. The formats for preparation of financial statements are prescribed under Section 29 of the Banking Regulation Act.

Banks are mandated to disclose additional information as part of annual financial statements:

• Capital Adequacy Ratio;
• Tier I ratio;
• Tier II ratio;
• Percentage of shareholding of the Government of India in nationalised banks;
• Net NPL ratio;
• Amount of provision made towards NPLs and provisions for income-tax for the year;
• Amount of subordinated debt raised as Tier II capital;
• Gross value of investments, provision for depreciation on investments and net value of investments separately for within India and outside India;
• Interest income as percentage to working funds;
• Non-interest income as a percentage to working funds;
• Operating profit as a percentage to working funds;
• Return on assets; business (deposits and advances) per employee
• Profit per employee;
• Maturity pattern of certain assets and liabilities;
• Movement in NPLs;
• Foreign currency assets and liabilities;
• Lending to sensitive sectors as defined from time to time.

However, we would have to go beyond these disclosures to provide for more disaggregated information including data on variability of profits over time. Further areas of disclosure of information relating to financial performance could include:

• Contribution of different activities and regions

• Impact of non accrual and impaired assets on financial performance

• Effect of hedging activities on income and expenses

• Income effect of securitisation

2.1.2 To assess the financial performance of a bank, it is essential to have a breakdown of income and expenses incurred. This information is necessary to assess the quality of earnings, to identify the reasons for changes in a given bank’s profitability from year to year and to compare the financial performance of different banks. Information on financial performance typically includes an income statement that groups income and expenses by nature or function within the bank. The income statement usually includes items for interest income and expense, fees and commissions, other non-interest income, operating expenses, charge for credit losses, any extraordinary items, tax expenses and net income.

The income statement usually includes items for interest income and expense, fees and commissions, other non-interest income, operating expenses, charge for credit losses, any extraordinary items, tax expenses and net income.

However, complete breakdown of income is not furnished in banks’ financial reporting making a meaningful assessment of the quality of income and inter-bank comparison difficult. Such break-up should be standardised and mandated for disclosure.

2.1.3 The notes to the income statement provide additional detail on important income and expense categories.

Notes containing details, wherever necessary, are being given.

2.1.4 For the purpose of assessing sustainability of profits, it is essential that the impact of acquisitions and lines of business discontinued during the year be disclosed.

Mergers and acquisition as also discontinuance of a line of business are new for the Indian banking industry. In the few cases in which these have occurred so far, only general assessments of their impact is given in the balance sheet.

Banks should be asked to make more quantitative assessment of their impact on profitability and disclose it in their balance sheet.

2.1.5 Key figures and ratios should include the return on average equity, return on average assets, net interest margin (net interest income divided by average interest earning assets), and cost-to-income ratio.

All these ratios are disclosed as per the regulatory requirements in this regard.

2.1.6 Business and geographical segment information aids in the analysis of past performance and assists in assessing future prospects. The user of financial information can achieve a better understanding of a bank’s overall financial performance if the bank discloses the contribution of different activities and regions to overall financial performance. In particular, this information helps the user assess the extent of diversification in the bank’s business and the contribution of specific business segments and regions that may be considered to be of a higher risk. It also facilitates awareness of the impact of significant changes, e.g., due to regional disturbances, on the bank as a whole.

A break-up of contribution of different activities to assess the diversification in banks’ business and contribution of different business lines is necessary. Banks should be asked to make these disclosures in their balance sheet. A timeframe of two or three years may be stipulated for this purpose.

2.1.7 Management has a detailed knowledge of the business that outsiders cannot have. Therefore, management can greatly assist both the market and supervisors by discussing the main factors that influenced a bank’s financial performance for the year, by explaining differences in performance between the current year and previous years and by discussing factors they believe will have a significant influence on the bank’s future financial performance.

This type of information is usually provided in management or director’s report to the market or supervisors to arrive at meaningful inferences.

Factors that impact current and next year’s profitability should necessarily be discussed explicitly as part of the Management Discussions and Analysis.

2.1.8 In many countries, comprehensive accounting guidance is available on the presentation and disclosure of information about financial performance. Authoritative guidance has been issued by legislators, regulators, and national and international accounting standard-setters, and should be referenced to identify appropriate disclosures and to gain an understanding of why they are useful.

In India, the ICAI guidelines on bank audit, which covers aspects of presentation and disclosure of financial information, is being followed. RBI has stipulated standards of disclosure from time to time based on international best practices.

The levels of disclosure in the balance sheets of Indian banks can be improved further. Areas of disclosure have been indicated above. Efforts have to be made to come close to internationally followed standards of disclosure within the next two years.

2.2 Financial Position (including capital, solvency and liquidity)

2.2.1 Market participants and supervisors need information about the financial position of an institution. Information about the financial position of a bank is useful in predicting the ability of the enterprise to meet its liabilities and financial commitments as they fall due. Information about the nature and amount of assets, liabilities, commitments, contingent liabilities, and shareholders’ funds, both at points in time and averages over periods, including their maturity and repricing structure, is useful for assessing a bank’s liquidity and solvency, and ultimately its financial strength, and the trends therein.

Information about the nature and amount of assets, liabilities, commitments, contingent liabilities and shareholders’ funds are furnished in the financial statements and in notes to the accounts.

Information detailing maturity and repricing structure of all assets and liabilities should form part of the mandatory disclosure.

2.2.2 Information about institutions’ provisions and allowances for losses and how these provisions and allowances are determined is important in assessing an institution’s ability to withstand losses.

Charge of loan loss provisions made during the year and the basis of provisioning are now being disclosed. However, as yet cumulative provisions held against loan losses and movement in provisions are not being disclosed.

These disclosures should be made mandatory.

2.2.3 To assess an institution’s financial position, it is essential to have a breakdown of assets and liabilities, and equity capital by type. Information on financial position typically includes a balance sheet that distinguishes different types of assets, liabilities and sources of equity capital. The balance sheet usually includes separate items for loans, trading securities, investment securities, tangible fixed assets (e.g., real estate), intangible fixed assets (e.g., goodwill), short-term debt and long-term debt.

Breakdown of assets and liabilities and equity capital by type and their distribution is given in the balance sheet. Information on securities held as investments and for the purposes of trading is also given separately. The format of balance sheet of banks provides for adequate breakdowns on both assets and liabilities sides.

2.2.4 Disclosure of off-balance sheet items may include information about notional amounts and fair values or replacement values of off-balance sheet transactions, and about commitments and contingent liabilities.

Commitments and contingent liabilities are being disclosed in the balance sheet.

Full disclosures with notional values and fair value of off-balance sheet transactions, commitments and contingent liabilities should be disclosed.

2.2.5 In notes to the balance sheet, additional information about the items in the balance sheet which is relevant to the needs of users may also be provided, e.g., fair value (trading account, loans, deposits, others).

Notes to consolidated balance sheet and income statements contain additional information relevant to users.

2.2.6 Information about regulatory capital and its components is important in analysing the financial position of a bank (Tier 1, Tier 2, Tier 3 – if applicable, risk-weighted assets, risk-based capital ratio), as well as information about equity capital (e.g., debt-to-equity ratio, restrictions on distributions). Information about the changes in the amount and types of capital, including the impact of earnings, dividends and capital issuances, is important in assessing the cushion available to absorb future potential losses and for the bank’s ability to sustain growth over the near term. Management’s discussion and analysis of a bank’s financial position and changes therein, help the market better understand and form expectations based on them.

In India information is being furnished on regulatory capital (Tier-I & Tier-II) but details of risk weighted assets, leverage ratio, restrictions on distributions, including the impact on earnings, etc., are not being furnished uniformly.

Disclosures relating to management of risks by banks such as calculation of capital requirements for credit risk, capital requirement for market risk and data relating to broad values at risk, stress/ back testing information will have to be broadly introduced in banks’ balance sheets. Alongside disclosures on capital allocation, future capital plans will also have to be disclosed. It should be possible for banks to begin providing these disclosures in two to three years time by when it can be made mandatory.

2.2.7 Information about the nature and amount of assets pledged as collateral, e.g., to support deposits, other liabilities and commitments, and the amount of secured liabilities is useful in assessing the financial position of a bank and, in particular, the collectibility of claims on the bank in case of its liquidation.

Banks in India do not accept collateralised deposits or any other such liabilities or commitments.

Where there are occasions of the bank having availed of collateralised lines for managing their liquidity, the details should be provided.

2.2.8 As with guidance on presentation and disclosure of financial performance, comprehensive accounting guidance on the presentation and disclosure of information about financial position is available in many countries. Authoritative guidance has been issued by legislators, regulators, and national and international accounting standard-setters.

Guidance on presentation of statement representing financial position (balance sheet) is prescribed by Section 29 of the Banking Regulation Act. Disclosure requirements are also being prescribed by the regulator from time to time.

RBI may consider issuing comprehensive guidelines on necessary disclosures in a banks balance sheet. Since disclosures in India are still in an evolutionary stage and additional disclosures are being added to the disclosure requirements, it would also be desirable to update these guidelines from time to time until the Indian disclosures fully match international standards in this regard. Initially, updating of these guidelines may be undertaken at shorter, say, annual intervals. A coordinated approach between the ICAI and the RBI may be adopted for this purpose.

2.3 Risk Management strategies and practices

2.3.1 Market participants and supervisors need information about a bank’s management strategies and policies for managing and controlling risks. Risk management is a key factor in assessing the future performance and condition of a bank and the effectiveness of management.

Directors’ report or management report forming part of the annual report contain information on bank’s management strategies.

2.3.2 Disclosures may include discussions of overall risk management philosophy, overall policy and methodologies, how risks arise, how risks are managed and controlled, and whether and how derivatives are used to manage risks. It may also be useful to discuss the risk management structure and risk measurement and monitoring (e.g., models, value-at-risk, simulation, credit scoring, capital allocation, etc.), monitoring process, model validation process, stress testing, back testing, the use of risk-mitigating tools (collateral/guarantees, netting agreements, managing concentrations), limits (e.g., credit limits, market risk limits), and periodic review of exposures.

Although risk management is a rather recent concept, bank managements are gearing themselves suitably to be in a position to furnish in their annual reports details of their risk management philosophy, strategies and methodologies.

More disclosures on risk management are essential. Banks will have to take steps so that even before they start making detailed analytical disclosures about their risk management arrangements, they begin disclosing details about risk mitigating tools being used by them, limits, exposure to banks, commercial and government entities, international exposures, subordinate assets, classification of exposures and information about types of counter-parties.

2.3.3 In addition to overall risk management strategies, individual discussions of risk exposures need to include specific risk management strategies.

2.3.4 It is a particular challenge for a bank to maintain transparency as risk management methods advance. Banks should strive to continue to provide meaningful information so the public understands the risk management techniques and measures used over time.

2.4 Risk exposure

2.4.1 Market participants and supervisors need qualitative and quantitative information about an institution’s risk exposures, including its strategies for managing risk and the effectiveness of those strategies. Together with the disclosure of a bank’s financial position, these help reflect its financial strength and viability and ultimately its ability to continue its business in times of stress.

RBI has issued detailed guidelines for implementation of Asset – Liability Management in banks and financial institutions. This was followed by a comprehensive set of guidelines on implementing an integrated risk management system in banks which includes credit risk, market risk and operational risks. Once ALM and Credit Risk Management become fully operational, banks in India will be in a position to measure and quantify various risks in addition to furnishing qualitative aspects of various risk exposures.

2.4.2 A bank’s risk profile, i.e., the risks inherent in its on- and off-balance- sheet activities at a point in time and its appetite for taking risk, provides information about the stability of an institution’s financial position and the sensitivity of its earnings potential to changes in market conditions.

Moreover, an understanding of the nature and extent of an institution’s risk exposures helps assess whether a bank’s returns are appropriate for the level of risk it has assumed.

2.4.3 Disclosures of risk information assist in assessing the amount, timing and certainty of future cash flows. Given the dynamic financial markets in which banks operate, and the influences of increased global competition and technological innovation, a bank’s risk profile can change very quickly. Therefore, users of financial information need measures of risk exposures that remain meaningful over time and which accurately reflect sensitivities to changes in underlying market conditions.

Measures such as VaR and/or EaR, which sufficiently capture a bank’s risk exposure, should also be disclosed at least on a quarterly basis along with quarterly operating results. Banks should also be encouraged to develop their own risk models, which appropriately capture their risk profile. Details of the model as well as the assumptions constraining it and the process employed for validating the model should also constitute part of the disclosure framework.

2.4.4 Traditionally, banks have focused on disclosing information about credit risk and market risk, including interest rate and foreign exchange risk, and, to a lesser extent, liquidity risk. In discussing each of these risk areas, an institution should present sufficient qualitative (e.g., management strategies) and quantitative information (e.g., position data) to help users understand the nature and magnitude of these risk exposures. Further, comparative information of previous years’ data should be provided to give the financial statement user a perspective on trends in the underlying exposures.

Banks in India have already begun providing both qualitative (e.g., management strategies) and quantitative information (position data) in the balance sheet. Concept of comparative information of previous years has also been introduced.

Banks’ annual reports do provide these information.

2.4.5 Other risk exposures such as operational, legal and strategic risk are less easy to quantify, but may be highly relevant. Qualitative information should be given about the nature of the risks and how they are managed.

Notes on account on the balance sheet contain details on legal risk. Other risks have so far not been forming part of the disclosures in the balance sheet.

A discussion on legal, operational and strategic risks may be made mandatory in the Management letter/ Director’s report to the share holders.

2.4.6 Credit risk

2.4.6.1 Disclosures should help the reader understand the magnitude of an institution’s credit exposure on an aggregate basis as well as its significant components. Further, the user of financial information should be able to understand how an institution manages credit risk and whether or not those strategies have been effective.

Credit related disclosures in the bank’s balance sheet are presumably limited to details of NPAs, provisions for loan losses and lending to some sectors which are considered sensitive.

At item 2.3.2, it was suggested that risk mitigating tools, limits, concentrations and exposures be disclosed. RBI may consider issuing some guidelines in this regard. It should be possible for some banks to make these disclosures about credit risk management in their balance sheet without much difficulty.

2.4.6.2 To achieve transparency, an institution should provide descriptive information about the business activities that create credit risk, its strategies regarding those business lines, and the nature and composition of the exposures that arise. Examples of useful disclosures include a discussion about business strategies, risk management processes and internal controls relating to activities that generate credit risk.

Business activities that create credit risks are not being separately identified. Quantitative information regarding gross positions, e.g., loans, investments and off-balance sheet exposures are given. We need to ensure that we begin with disclosures, which are of greater relevance in our context including those which are sophisticated and have relevance in more complex situations.

We should follow a gradual process of disclosure on risk so that key elements remain in focus. Suggestions in this regard have been given while examining earlier items. The proposed guidelines to be issued by RBI will be able to take care of this phasing.

2.4.6.3 In addition, quantitative information should be provided regarding gross positions (e.g., loans, investments, trading and off-balance-sheet exposures), information about the types of counterparties (e.g., exposure to banks, commercial, and government entities; domestic and international exposures; subordinate assets, and secured and unsecured exposures), and significant concentrations of credit exposure. Further, information on potential credit risk exposure arising from existing derivative contracts is useful, since that exposure may change rapidly and substantially.

2.4.6.4 Disclosures about the quality of the current loan and investment portfolios and other significant counterparty exposures provide important information about an institution’s future earnings potential. Quantitative disclosures should include the amount of problem loans and other assets, an ageing schedule of past due loans and other assets, concentrations of credit, and aggregate exposures by counterparty credit quality.

In addition, information should be provided about the allowances for credit losses and how those allowances have changed from period to period.

While aggregate amount of problem loans (NPAs) is given in the management report, details as to ageing schedule of past due loans and other assets, concentrations of credit, aggregate exposures by counter party credit quality, etc., are not given.

These disclosures will be helpful and may be made mandatory. In the phased increase of disclosures, these can be prioritised higher.

2.4.6.5 An understanding of an institution’s credit risk position is facilitated through disclosure of risk management strategies. For example, disclosures about the use of collateral and guarantees, the use of credit scoring and portfolio risk measurement models and the organisation of the credit risk function and similar discussions about activities undertaken to manage credit exposures provide background information useful in assessing the significance of risk exposures. Information about the use of credit limits and internal credit ratings is also useful.

Disclosures in detail about risk management strategies are not currently being furnished, except brief description of the organisation of the credit risk management function. But disclosures on these are expected to improve in the ensuing years.

2.4.7 Market risk

2.4.7.1 As with credit risk, an institution should provide both quantitative and qualitative information regarding its market risk exposures. Market risk arises from the potential for changes in market rates and prices, including interest rates, foreign exchange rates, and equity and commodity prices. An institution’s disclosures about each of these types of risk should be commensurate with the degree of exposure.

At present, except for depreciation in the value of investments arising out of interest rate risk, and equity price risk, the impact of interest rate risk on bank’s NIM or impact of foreign exchange risk on unhedged exposures are not disclosed.

Disclosures in these areas may be prescribed.

2.4.7.2 Since interest rate risk is especially relevant to banks, management should provide detailed quantitative information about the nature and extent of interest rate-sensitive assets and liabilities and off-balance sheet exposures. Examples of useful disclosures for the banking book include breakdowns of fixed and floating rate items and the net interest margin earned. Other useful disclosures include the duration and effective interest rates of assets and liabilities. These disclosures should also identify assets and liabilities, and related gains and losses.

Such detailed information on interest rate risk and the extent of interest rate – sensitive assets and liabilities and off-balance sheet exposures are not furnished since ALM and other Bank Risk Management tools are just in their infancy in India.

A beginning can be made by presenting of quantitative information about the nature and extent of interest rate sensitive assets and liabilities.

2.4.7.3 Disclosures should also provide information about the interest rate sensitivity of an institution’s assets and liabilities. For example, disclosures about the effect on the value of assets, liabilities and economic equity given a specific change (increase or decrease) in interest rates can provide a useful summary measure of the institution’s risk exposure.

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2.4.7.4 To facilitate understanding of foreign exchange risk exposures, institutions should provide summarised data for significant concentrations of foreign exchange exposure by currency, broken down by hedged and unhedged exposures.

Summarised data for significant concentrations of foreign exchange exposure by currency, broken down by hedged and unhedged exposures are not provided now.

This should be prescribed.

2.4.7.5 It is also helpful to disclose information about investments in foreign subsidiaries (foreign currency translation risk). This quantitative information should be supplemented with discussion about the nature of the currency exposure, how that exposure has changed from year to year, foreign exchange translation effects, the earnings impact of foreign exchange transactions and the effectiveness of risk management (hedging) strategies.

Detailed information on investments in foreign subsidiaries (Translation Risk) or foreign exchange transactions risk, the earnings impact of foreign exchange transactions and effectiveness of hedging strategies are not furnished.

2.4.7.6 For larger institutions, " value-at-risk" (VAR) or "earnings-at-risk" (EAR) disclosures can provide summarised data about a market risk exposure. Typically, VAR and EAR disclosures are provided for interest rate and foreign exchange risk, but these models could also be used to summarise equity and commodity risk exposures.

Disclosures on "Value at Risk" (VAR) and "Earnings at Risk" (EAR) are currently not provided. Banks should be encouraged to disclose this information on a voluntary basis to start with.

While these disclosures will have to be finally prescribed, in most cases banks have yet to gain experience in risk measurement. To be able to use models for this purpose efficiently they will need at least two years in case of larger banks and even more in case of smaller ones. RBI may consider a time frame of 3-4 years for prescribing these disclosures in the balance sheet. To begin with VaR and Ear may be prescribed in selected areas of activity, e.g., foreign exchange, treasury activities and investments.

2.4.7.7 Specific disclosures relating to these models include the magnitude of the exposure on a daily, weekly or monthly basis, maximum and minimum values, and end-of-period values. To help the user understand such model-generated information, the assumptions used in calculations (e.g., confidence level, holding period, etc.) should also be disclosed. In addition, a histogram of the daily profits or exposures over the reporting period may facilitate an understanding of the volatility of risk exposures.

2.4.8 Liquidity risk

2.4.8.1 Liquidity is the ability to have funds available to meet the commitments of the bank. To enable market participants to understand an institution’s liquidity risk exposure, an institution should provide information about its available liquid assets, as well as its sources and uses of funds. For example, disclosures about short-term assets (e.g., cash and cash equivalents, repurchase agreements and interbank loans) and short-term liabilities (e.g., reverse repurchase agreements, commercial paper) provide basic information about an institution’s liquidity profile. A cash flow statement shows the sources and uses of funds and provides an indication of an institution’s ability to generate liquid assets internally. Information about concentrations of depositors and other fund providers, maturity information about deposits and other liabilities, and the amount of securitised assets, are useful in assessing an institution’s liquidity.

Except for cash flow statement, detailed information on liquidity risk exposure is currently not being furnished. However, with the concept of ALM expected to stabilise in Indian banking in the ensuing years, detailed disclosures on liquidity risk exposure will be possible.

Being largely owned by the Government, Indian banks so far have had so serious concerns about liquidity. With the changing scenario, liquidity will become an issue. As more detailed statement of cash flow than at present (this statement is presently given in the balance sheet to meet the listing requirements of the stock exchange) showing sources and uses of funds should be prescribed for disclosures.

2.4.8.2 Descriptive discussion about the diversity of funding options and contingency plans provides additional perspective on the potential impact of liquidity risk to the institution.

Details about the diversity of funding options and contingency plan are also not provided.

This should form part of the management’s letter/ Director’s report on managing liquidity risks.

2.4.9 Operational and legal risks

2.4.9.1 Institutions should also provide disclosures about operational and legal risks. Operational risk disclosures should include information about the main types of such risk and should identify any specific problem (e.g., Year 2000) considered to be individually significant.

No such disclosures on operational and legal risks are made at present.

The ability of the accounting as well as internal control and management systems to support the growing size and diversity of the business is the main operational risk faced by banks. Increasing frauds and deficiencies in follow up are manifestation of this risk intensifying. A discussion in the management letter/ Director’s report on this issue along with a discussion on the sufficiency of technology used by the bank and fall back positions in the event of their failure may be prescribed. Details of transactions in nominal accounts pending reconciliation should also de disclosed.

2.4.9.2 Legal risk disclosures include legal contingencies (including pending legal actions) and a discussion and estimate of the potential liabilities. Qualitative information about how the bank manages and controls these risks should be given.

Note to the accounts in the disclosure on contingent liabilities carry details on pending legal action and estimate of potential liabilities.

2.5 Accounting policies

2.5.1 Market participants and supervisors need information about the accounting policies that have been employed in the preparation of financial reports. Accounting policies, practices and procedures differ not only between countries, but also between banks in the same country. Accordingly, users of accounting information need to understand how items are being measured to properly interpret the information. Disclosure of significant accounting policies on which financial reporting is based enables users to make reliable assessments of the bank’s reported position and performance.

Significant accounting policies are being disclosed.

2.5.2 Disclosure of accounting policies may be appropriate with respect to general accounting principles, changes in accounting policies/practices, principles of consolidation, policies and methods for determining when assets are impaired, recognising income on impaired assets and losses on non-performing credits, policies to establish specific and general loan loss allowances, income recognition, valuation policies (trading securities, investment securities, loans, tangible fixed assets, intangible fixed assets, liabilities, etc.), recognition/derecognition policies, securitisations, foreign currency translations, loan fees, premiums and discounts, repurchase agreements, securities lending, premises/fixed assets, income taxes, and derivatives (hedging, non-hedging, losses on derivatives).

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2.6 Basic business, management and corporate governance information

2.6.1 To accurately evaluate a bank’s disclosures about its financial position and financial performance and its risks and risk management strategies, market participants and supervisors need fundamental information about the bank’s business, management and corporate governance. Such information can help provide the appropriate perspective and context to understand a bank’s activities. For example, management’s discussion about the bank’s position in the markets in which it competes, its strategy and its progress towards achieving its strategic objectives is important for assessing the bank’s future prospects.

Directors’ or top management report in the annual report contain detailed information about the bank’s business management, its different activities, strategies and plans for the future. Discussion on corporate governance is also now forming part of these reports.

2.6.2 The organisation of a bank, in terms of both its legal and management structure, provides information about an institution’s key activities and its ability to respond to changes in the marketplace. Further, such information may provide an indication of the institution’s efficiency and overall strength. Accordingly, it is appropriate to disclose information about the board structure (e.g., the size of the board, board committees, and membership), senior management structure (responsibilities, reporting lines), and the basic organisational structure (line of business structure, legal entity structure).

Recently, a beginning has been made by some banks in disclosing information about the broad structure with regard to Board Committees and membership, Senior Management structure with responsibilities and reporting lines and the basic organisational structure.

These disclosures should be prescribed for all banks uniformly.

2.6.3 In addition, information should be provided about the qualifications and experience of the board and senior executives. This information may be helpful in assessing how an institution may perform in times of stress or how it may react to changes in the economic or competitive environment.

Information on qualifications and experience of the board and senior executives are being furnished.

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2.6.4 Information about the incentive structure within a bank, including its remuneration policies, such as the amount of executive compensation and the use of performance bonuses and stock options, helps evaluate the incentives management and staff have to take excessive risks.

Information on incentive structure within a bank, remuneration policies, the use of performance bonuses and stock options are not given.

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2.6.5 Useful information may include a summary discussion of the philosophy and policy for executive and staff compensation, the role of the board of directors in setting compensation, and compensation amounts.

Summary discussion of the philosophy and policy of executive and staff compensation, the role of the board in setting compensation are not provided.

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2.6.6 In addition, banks should provide information on the nature and extent of transactions with affiliates and related parties. Such information is useful in identifying relationships that may have a positive or negative impact on a bank’s financial position and performance. Further, it can help assess its susceptibility to the effects of affiliates on the bank’s financial performance (contagion risk).

Nature and extent of transactions with affiliates and related parties are not disclosed.

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2.6.7 Finally, institutions should consider providing general information that would help market participants and supervisors gain a broad understanding of the institution’s culture. As indicated previously, banks should be innovative in identifying the types of information they provide and the methods by which they provide such data.

General information on the institution’s culture is provided by some banks in the annual report as part of management discussion/ report.

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2.6.8 Supervisors and public policy makers should focus their efforts on promoting high-quality disclosure standards, taking into consideration the recommendations presented in this paper, and on developing mechanisms that ensure compliance with those standards.

RBI and government are very focussed in their efforts on promoting high quality disclosure standards.

The progress shall have to be gradual but sustained. While there will be some key disclosures which must find place in balance sheet of all banks as prescribed by RBI, individual banks should be encouraged to make additional disclosures which they consider relevant to their business and balance sheet.

Principle

Indian Position

Remarks

1.

Disclosures in a bank’s annual financial reports should be adapted to the size and nature of the bank’s operations in accordance with the materiality concept.

As of now, the disclosure requirements are uniform irrespective of the size of banks’ operations.

2.

A bank should disclose information about the accounting policies, practices and methods it uses to account for its credit risk exposures.

Banks disclose information regarding the level of non-performing assets. These are required to be in compliance with the guidelines set out by the RBI. Banks are, however, free to adopt a more prudent approach, in which case, these do find mention in the balance sheets.

3.

A bank should disclose information on the accounting policies and methods it uses to determine specific and general allowances, and it should explain the key assumptions it uses.

This is generally mandated by the regulator. The banks are, however, free to adopt a stricter policy in regard to methods it uses for determining allowances. A policy which deviates from the guideline given by the regulator is generally made public.

4.

A bank should disclose qualitative information about the nature of credit risk in its activities and describe how credit risk arises in those activities.

This is not being provided as of now.

5.

A bank should disclose information on the management, structure and organisation of its credit risk management function.

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6.

A bank should disclose qualitative information on its credit risk management and control policies and practices.

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7.

A bank should disclose information on its techniques and methods for managing past due and impaired assets.

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8.

A bank should provide information on its use of credit scoring and portfolio credit risk measurement models

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9.

A bank should disclose balances of credit exposures, including current exposure and, where applicable, future potential exposure, by major categories.

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10.

A bank should disclose information about credit exposure by business line.

Business line-wise exposure is not being disclosed. However, exposure to sensitive sectors such as real estate and capital markets are being disclosed. Banks also disclose the extent of lending to the priority sector.

11.

A bank should disclose information about credit exposures by major categories of counterparties.

--do--

12.

A bank should disclose information about credit exposures by geographic areas.

--do--

13.

A bank should disclose information about significant concentrations of credit risk.

--do--

14.

A bank should disclose the effect of credit risk mitigation techniques, including collateral, guarantees, credit insurance and legally enforceable netting arrangements.

--do--

15.

A bank should disclose quantitative and qualitative information about its use of credit derivatives and other instruments that reallocate credit risk.

Credit derivatives are yet to be introduced in the country. Information in respect of other credit mitigating instruments, such as securitisation, factoring and forfaiting, etc., are not disclosed in the balance sheets.

16.

A bank should disclose quantitative and qualitative information about its securitisation activities

This is not being provided as of now. However, securitisation is yet to pick up in the country in a big way and, as such, its effect is negligible as of now.

17.

A bank should disclose summary information about its contractual obligations with respect to recourse arrangements and the expected losses under those arrangements.

This is not being done as of now.

18.

A bank should provide summary of information about its internal rating process and the internal credit ratings of its credit exposures.

--do--

19.

A bank should disclose total credit exposures by major asset category showing impaired and past due amounts relating to each category.

Banks disclose information in regard to their gross and net NPA position and changes in NPAs and provisions made during the year in the notes on account to the balance sheet.

20.

A bank should disclose the amounts of specific, general and other allowances. Where applicable, these allowances should be disclosed by major asset category.

While provisions made during the year are disclosed, these are not being classified by asset category. Cumulative provisions are not being disclosed.

21.

A bank should disclose a reconciliation of changes in the allowances for credit impairment.

Banks disclose information in regard to their gross NPA position and changes in NPAs during the year and the amount of provisions held against the NPAs.

22.

A bank should disclose credit exposures on which the accrual of interest or other contractual cash flows – in accordance with the terms of the original agreement – has ceased because of deterioration in credit quality.

As per current instructions, interest cannot be accrued in respect of NPAs.

23.

A bank should disclose summary information about credit exposures that have been restructured during the year.

This is being disclosed.

24.

A bank should provide information on revenues, net earnings and return on assets.

This information is being disclosed.

No.

Principle

Indian Position

Remarks

A. Capital Adequacy Principles Paper – Guiding Principles

Acceptable capital adequacy measurement techniques should be designed to

I.

detect and provide for situations of double gearing, i.e., where the same capital is used simultaneously as a buffer against risk in two or more legal entities; proceeds in the form of equity, which can result in excess leverage;

The capital invested in subsidiaries (where banks’ holding is more than 50 per cent) is deducted from the Tier-I capital of the bank to avoid double gearing. However, other investments which are below 50 per cent are not deducted from the investing bank’s capital.

Consolidation of accounts and presentation of consolidated financial results of all group entities is still not essential under the generally accepted principles of accounting in India. The emergence of financial conglomerates with regulated entities engaged to a significant extent in atleast two out of the three activities of banking, insurance and securities business is rather recent. Principles and systems for their regulation as entities in a conglomerate and for coordination between the concerned different regulators are also to be developed as yet. Urgent attention would need to be paid to develop suitable mechanisms.

II.

Detect and provide for situations where a parent issues debt and downstream the proceeds in the form of equity, which can result in excessive leverage;

Such deduction would normally be possible by adopting group-wide capital adequacy measurement. In the absence of consolidated accounts, however, the effective leverage of a subsidiary (dependent) unit gets computed on solo basis only. Protection against the risk of excessive leverage is available on account of deduction of the parent body’s investment at face value from its regulatory capital.

III.

include a mechanism to detect and provide for the effects of double, multiple or excessive gearing through unregulated intermediate holding companies which have participation in dependants or affiliates engaged in financial activities.

At present there is no case of an unregulated entity (of a financial conglomerate) acting as the holding company of a bank or other regulated entities.

IV.

include a mechanism to address the risks being accepted by unregulated entities within a financial conglomerate that are carrying out activities similar to the activities of entities regulated for solvency purposes (e.g., leasing, factoring, reinsurance)

-do-

V.

address the issue of participations in regulated dependants (and in unregulated dependants covered by principle IV.) and to ensure the treatment of minority and majority interests is prudentially sound.

-do-

B. Fit and Proper Principles Paper – Guiding Principles

1.

In order to assist in ensuring that the regulated entities within financial conglomerates are operated prudently and soundly, fitness and propriety or other qualification tests should be applied to managers and directors of other entities in a conglomerate if they exercise a material or controlling influence on the operations of regulated entities.

Regulations take care to ensure that unregulated entities do not normally exercise material or controlling influence on operations of regulated entities. Where it is perceived that managers and directors of other entities in a conglomerate can exercise a material or controlling influence on the operations of a regulated entity, fitness or propriety or other qualification tests are applied.

In the absence of any clear guidelines or established practices on this issue, the approach adopted in this regard is not uniform. RBI may consider issuing suitable guidelines on the subject considering the emergence of conglomerates on the financial scene.

2.

Shareholders whose holdings are above specified thresholds and/or who exert a material influence on regulated entities within that conglomerate should meet the fitness, propriety or other qualification tests of supervisors.

Fitness, propriety and other qualification tests are at present not applied to shareholders.

Shareholders with shareholding beyond a threshold, say 10 per cent, are often in a position to exert material influence on regulated entities. The regulator, however, does not, as a matter of uniform policy apply any fitness, propriety or qualification tests on all such shareholders. Considering the potential of risk contained in such a situation, it would be desirable to put in place arrangements for applying fit and proper tests on all shareholders with shareholdings beyond a specified threshold say 10 per cent. Suitable legal provisions would need to be introduced in the Banking Regulation Act empowering the RBI clearly in this regard.

3.

Fitness, propriety or other qualification tests should be applied at the authorisation stage and thereafter, on the occurrence of specified events.

Fitness, propriety and other qualification tests are normally applied at the authorisation stage. Thereafter, however, there are no specified events excepting changes in the top position, on the occurrence of which the tests will be applied.

4.

Supervisors’ expectations are that the entities will take the measures necessary to ensure that fitness, propriety or other qualification tests are met on a continuous basis.

We are in agreement with this view.

Fitness, propriety or other qualification tests need to be applied on a continuous basis so that occurrence of any event which raises any doubt about fitness and propriety of a manager, director or a shareholder (with shareholding beyond a specified level), results in the test being applied.

5.

Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or director of another regulated entity within the conglomerate, the supervisor should endeavour to consult the supervisor of the other regulated entity as part of the assessment procedure.

Exchange of information between two supervisors about a manager or a director of a regulated entity who is deemed to exercise material influence on the operations of another regulated entity is only on case to case basis. The practice is as yet neither formalised nor universal.

-do-

6.

Where a manager or director deemed to exercise a material influence on the operations of a regulated entity is or has been a manager or director of an unregulated entity within the conglomerate, the supervisor should endeavour to consult with the supervisors of other regulated entities that have dealing with the unregulated entity as part of the assessment procedure.

We are in agreement with this view.

-do-

7.

Supervisors should communicate with the supervisors of other regulated entities within the conglomerate when managers, directors or key shareholders are deemed not to meet their fitness, propriety or other qualification tests.

-do-

RBI may consider issuing specific and clear instructions in this regard. With most banks going for insurance business such exchange of information between regulators regarding directors/managers would be essential.

C. Principles for Supervisory Information Sharing Paper – Guiding Principles

1.

Sufficient information should be available to each supervisor, reflecting the legal and regulatory regime and the supervisor’s objectives and approaches, to effectively supervise the regulated entities residing within the conglomerate.

Supervisors are armed with sufficient legal powers to call for any information that it may require in the exercise of their supervisory functions.

Arrangements should be formalised for exchange of information between all regulators involved in regulation of different entities in a conglomerate.

2.

Supervisors should be proactive in raising material issues and concerns with other supervisors. Supervisors should respond in a timely and satisfactory manner when such issues and concerns are raised with them.

We are in agreement with the view.

-do-

3.

Supervisors should communicate emerging issues and developments of a material and potentially adverse nature, including supervisory actions and potential supervisory actions, to the primary supervisor in a timely manner.

The concept of primary supervisors has not yet been introduced in India.

RBI may consider introducing the concept of primary supervisor. In the context of almost all major banks going in for insurance as well as securities business, designating one of the supervisors as the primary supervisor will substantially improve much needed coordination between different supervisors (regulators) and add to the scope and quality of the overall supervision of the conglomerate.

4.

The primary supervisor should share with other relevant supervisors information affecting the regulated entity for which the latter have responsibility, including supervisory actions and potential supervisory actions, except in unusual circumstances when supervisory considerations dictate otherwise.

We are in agreement with this view.

5.

Supervisors should purposefully take measures to establish and maintain contact with other supervisors and to establish a climate of cooperation and trust amongst themselves.

-do-

D. Ten Key Principles on Information Sharing

1.

Authorisation to share and gather information: Each Supervisor should have general statutory authority to share its own supervisory information with foreign supervisors, in response to requests, or when the supervisor itself believes it would be beneficial to do so. The decisions about whether to exchange information should be taken by the Provider, who would not have to seek permission from anyone else. A provider should also possess adequate powers (with appropriate safeguards) to gather information sought by a Requestor.

In India, supervisors, as providers of information have both the ability to collect information and the freedom and powers to share the same with other supervisors, within the country and abroad.

2.

Supervisors from different sectors of financial services should be able to share supervisory related information with each other both internationally (e.g., a securities supervisor in one jurisdiction and a banking supervisor in another) and domestically.

There is no legal or any other bar to such sharing of information between supervisors of different financial sectors even if they are in different jurisdictions.

3.

Information about systems and controls: Supervisors should cooperate in identifying and monitoring the use of management and information systems, and controls, by internationally active firms.

There is no formal system as yet for such cooperation, but, there is no bar for putting in place such a system.

4.

Information about individuals: Supervisors should have the authority to share objective information of supervisory interest about individuals such as owners, shareholders, directors, managers or employees of supervised firms.

There is no disability with regard to sharing of such information about individuals.

The RBI shares information with other supervisors more with the force of set-practices and conventions than with the support of clearly stated legal provisions. In order to place the arrangement on firmer footings and in keeping with the currently accepted international practices the desirability of suitable enacting these powers needs to be considered.

5.

Information sharing between exchanges: Exchanges in one jurisdiction should be able to share supervisory information with exchanges in other jurisdictions, including information about the positions of their members.

Exchanges in India do not have supervisory functions.

6.

Confidentiality: A Provider should be expected to provide information to a Requestor that is able to maintain its confidentiality. The Requestor should be free to use such information for supervisory purposes across the range of its duties, subject to minimum confidentiality standards.

Confidentiality is insisted upon for information shared but, at the same time, the use of the information is not restricted for genuine supervisory uses. For information received as a receiver of such information also, confidentiality is ensured.

7.

Formal agreements and written requests: The Requestor should not have to enter into a strict formal agreement in order to obtain information from a Provider. Nor should a written request be prerequisite to the sharing of information, particularly in an emergency.

Information is usually shared even in the absence of formal written agreements to that effect.

8.

Reciprocity of requirements: These, too, should not be a strict precondition for the exchange of information, but the principle of reciprocity may be a consideration.

Reciprocity is a consideration for sharing of information.

9.

Cases which further supervisory purposes: In order to ensure the integrity of firms and markets, the Provider should permit the Requestor to pass on information for supervisory or law enforcement purposes to other supervisory and low enforcement agencies in its jurisdiction that are charged with enforcing relevant laws, in cases which further supervisory purposes.

There is no bar on passing on received information to other supervisors or law enforcement agencies for the purpose of supervision or law enforcement.

10.

Removal of laws preventing supervisory information exchange: To facilitate cooperation between the supervisors of internationally-active groups, each jurisdiction should take steps to remove or modify those laws and procedures that prevent or impede the exchange of necessary supervisory information.

There are no laws or procedures which prevent or impede the exchange of necessary supervisory information.

E. Coordinator Paper – Guiding Principles

1.

Arrangements between supervisors relating to the coordination process should provide for certain information to be available in emergency and non-emergency situations.

RBI has as yet not entered into any formal arrangement with other supervisors for coordination on information sharing and/or any such other specific purpose.

2.

The decision to appoint a coordinator and the identification of a coordinator should be at the discretion of the supervisors involved with the conglomerate.

There is no system as of now for appointment of a coordinator to facilitate information sharing between the supervisors involved with a conglomerate.

The emergence of conglomerates on the Indian business/finance scene is recent. But soon regulation and supervision of different entities in a conglomerate by different regulators will be a common occurrence and practices like designating a coordinator for information sharing will have to be considered in the interest of comprehensive regulation and safety and security of the system as a whole. The advent of MNCs many of which are large conglomerate, will accentuate this need. RBI may urgently consider the desirability of introducing and participating in a scheme of formalised coordination between different regulators and designation of one of the regulators involved as a coordinator with clearly assigned roles and responsibilities.

3.

Supervisors should have the discretion to agree amongst themselves the role and responsibilities of a coordinator in emergency and non-emergency situations.

-do-

-do-

4.

Arrangements for information flows between the coordinator and other supervisors and for any other form of coordination in emergency and non-emergency situations should be clarified in advance where possible.

-do-

- do -

5.

Supervisors’ ability to carry out their supervisory responsibilities should not be constrained by reason of a coordinator being identified and a coordinator assuming certain responsibilities.

-do-

-do-

6.

The identification of a coordinator and the determination of responsibilities for a coordinator should be predicated on the expectation that those responsibilities would enable supervisors to better carry out the supervision of regulated entities within financial conglomerates.

-do-

-do-

7.

The identification and assumption of responsibilities by a coordinator should not create a perception that responsibility has shifted to the coordinator.

-do-

-do-

Principle

Indian Position

Remarks

1.0 Supervisory strategy with respect to risk concentration in a conglomerate necessarily reflects the powers that the supervisors have to induce financial institutions to reduce excessive concentrations and other dangerous exposures. Supervisors should have sufficient authority to gather and safeguard information to be able to monitor material risk concentrations across sectors and to understand how such risks are managed. Supervisors at the sector level should review whether they have sufficient powers to protect the regulated entity from problematic risk concentrations, for example, through requiring reduction in exposures or higher capital in the regulated entity. Where supervisors lack sufficient powers, they should seek the additional authority they need.

Conglomerate structures in India are relatively uncomplicated and simple. The Banking Regulation Act, 1949, empowers the RBI to gather all material information from commercial banks. Although there is no explicit legal provision empowering the RBI to call for information directly from subsidiaries or joint ventures of banks, in practice there has been no constraint in RBI receiving financial and structured information on risk concentrations and exposures in respect of these down stream and upstream entities. RBI has the necessary powers to direct the banks in a manner that can remedy problems relating to risk concentration. For example RBI has powers to require reduction in exposures of a bank and/ or a higher capital.

1.1 Supervisors should take steps, directly or through regulated entities, to provide that conglomerates have adequate risk management processes in place to manage group-wide risk concentrations. Where necessary the supervisors should consider appropriate measures, such as reinforcing these processes with supervisory limits.

RBI has issued general guidelines to banks in regard to management of various types of risks. Further prudential guidelines are also in place in regard to banks’ exposures to counterparty/ single borrower, borrower groups, and sensitive sectors particularly to stock market, real estate and commodities. There are currently no prudential requirements in regard to group-wide risk concentration.

RBI should consider issuing appropriate guidelines requiring banks to ensure that they and their subsidiaries and joint ventures put in place adequate risk management processes covering group-wide risk concentrations as well. It would also be useful to stipulate norms for concentration and exposure limits in respect of all associated entities on a solo and consolidated basis.

1.2 Supervisory concerns emerging from risk concentrations can be mitigated by good risk management and internal control policies, and supplemented by the holding of adequate capital. Risk concentrations need to be monitored both in the legal entity and across the different sectors of the conglomerate to provide for the protection of the regulated entities. Supervisors should take steps directly or through regulated entities to provide that financial conglomerates have controls in place to manage their risk concentrations. For example, where the supervisor does not consider the controls adequate, supervisors should consider imposing supervisory limits.

Assessment of risk concentration in banks is normally made during the on-site inspection of banks on a stand-alone basis. Group-wide assessment of risk concentration is not normally done. Credit risk concentrations in individual banks are, however, monitored regularly through the off-site monitoring systems.

In order to more fully comply with best practices in this regard, it is necessary for RBI to issue instructions to banks to ensure that their up-stream and down-stream units have appropriate controls in place to manage their risk concentrations. To be effective it is preferable to prescribe limits linked to the unimpaired regulatory capital of the bank.

1.3 A sound risk management process begins with policies and procedures approved by the board of directors or other appropriate body and active oversight by both the board and senior management. The process should include clearly assigned responsibilities for the measurement and monitoring of risks and risk concentrations at the conglomerate level. The conglomerate should have in place a process to identify the conglomerate’s principal risks, a comprehensive measurement system, a system of limits to manage large exposures and other risk concentrations and processes of stress testing and scenario and correlation analysis. Comprehensive management information and reporting systems are essential to sound risk management approach. Finally, sufficient attention should be given to non-quantifiable, as well as quantifiable, risks.

Banks in India are yet to develop and implement sound risk management policies and procedures including sophisticated measurement techniques. The RBI has been proactive in providing guidance to banks in regard to the principles, measurement and management of risks and risk concentrations covering quantifiable and non-quantifiable risks. RBI has also been proactive in urging and motivating the Board of Directors and senior management of banks to exercise oversight on risk management practices and procedures in the banks. However, these are not extended to the conglomerate level. Sound and reliable management information systems, which are essential for an effective risk management approach, are largely lacking due to the low level of technology application and networking within and across individual units.

Comprehensive management information and reporting system at the conglomerate level would have to be insisted upon by the RBI.

1.4 As financial institutions from different sectors merge and financial conglomerates evolve, the potential for new types of concentrations arise. When evaluating proposed mergers and expansions, supervisors should take into account management plans to manage material risk concentrations at a group-wide level.

Assessments of the risk profiles of amalgamating entities on a solo and combined basis is done while evaluating mergers and acquisitions. However, the assessment is not normally extended to cover its impact on the evolving risk profile at the conglomerate level.

2.0 Supervisors should monitor material risk concentrations on a timely basis, as needed, through regular reporting or by other means to help form a clear understanding of the risk concentrations of the financial conglomerate.

Refer to item 1.1 to 1.4. Material risk concentrations, including country risk exposures, are monitored on a quarterly basis in respect of the foreign branches, subsidiaries and joint ventures of Indian banks.

It is considered essential that the supervisor develops a clear understanding of the risk concentration at the conglomerate level. This issue would need to be pursued through the regulated entities.

2.1 Supervisors should have access to information or should be informed on a regular basis of the nature and size of material risk concentrations. To facilitate the process, supervisors may find it useful to set limits or thresholds that serve as reporting or supervisory benchmarks. Given the dynamic nature of the conglomerate organisations and the ease with which risk profiles can change, monitoring should be frequent. Risk concentrations or stress scenarios that generate large losses should be acted upon promptly through follow-up questions of the conglomerate’s management.

There are currently no major impediments to the RBI having access to such information on a consolidated as well as disaggregated unit-wise basis, apart from data management standards obtaining in individual banks.

-do-

3.0 Supervisors should encourage public disclosure of risk concentrations.

We are in agreement with this view.

These disclosures will be helpful and may be made mandatory.

3.1 Public disclosure of risk concentrations at the group-wide level can promote market discipline. Effective public disclosures allow market participants to reward conglomerates that manage risks effectively and to penalise those that do not, thus reinforcing messages provided by the supervisor. For market discipline to be effective, disclosures need to be timely, reliable, relevant and sufficient. Given the complexity and variety of possible risk concentrations in a financial conglomerate, enhancing disclosure includes expanding the range of the most important risk concentrations in periodical financial statements, especially in the annual reports, while making timely and reliable disclosures of exposures outside normal reporting cycle as necessary to provide greater detail in response to market concerns. A description of the conglomerate’s risk management approach to concentrations would be a useful supplement to quantitative information. In addition public disclosure can facilitate supervisory monitoring and risk assessment and lead supervisors to explore further material issues.

While the type of information usually provided in the annual report and management or director’s report to the market or supervisors generally allow the users to arrive at meaningful inferences in regard to financial condition, solvency, earnings performance and brief risk profile, such disclosures on a consolidated basis are currently not mandatory. RBI currently requires banks to only append the financial statements in respect of subsidiaries/ joint ventures along with the financials of the parent unit.

We should follow a gradual process of disclosure on risk so that key elements remain in focus. Suggestions in this regard have been given while examining issues involved in enhancing bank transparency (Chapter 6). RBI may also consider requiring banks to make public the management’s assessment of risk-concentration across sectors on a group-wide basis.

4.0 Supervisors should liase closely with one another to ascertain each other’s concerns and coordinate as deemed appropriate any supervisory action relative to risk concentrations within the group.

Arrangements for information sharing between domestic regulatory bodies exist. However, notwithstanding mechanisms for coordination having been established, the level of actual coordination is not very high and seldom provides the regulators opportunities to take coordinated supervisory actions.

Urgent steps are required to be taken so that coordination between different regulators is of a high order and enables them to take coordinated supervisory action, particularly in the area of risk management by the different entities of a conglomerate.

4.1 Risk concentrations may arise from exposures in many parts of a financial conglomerate. The effective assessment, monitoring and control of such concentrations by supervisors is likely to require sectoral expertise as well as a good understanding of the techniques used by other supervisors. Supervisors need to communicate on risk concentrations found within sectors or jurisdictions, as supervision at the sector level may not detect instances of arbitrage. In addition supervisors may need to coordinate across sectors and jurisdictions.

We are in agreement with this view.

-do-

The range and scope of information exchange among sectoral supervisors needs to be made broader and multi-point. It would also be useful to have a structured agenda so that all material issues with cross-sectoral implications receive appropriate attention.

5.0 Supervisors should deal effectively and appropriately with material risk concentrations that are considered to have a detrimental effect on the regulated entities, either directly or through an overall detrimental effect on the group.

At present RBI has not articulated a general approach on how to deal with risk concentration at the group level apart from issuing guidelines to banks to have arms length relationship in their commercial transactions with subsidiaries.

RBI may consider including material risk concentrations at the conglomerate level as one of the possible triggers for the prompt corrective action framework, which is being developed.

5.1 If a financial conglomerate is exposed to risk concentrations that may affect its financial stability, supervisors should take appropriate measures with respect to regulated entities. In some cases, supervisors may elect to take preventive measures. For example supervisors with necessary powers may consider establishing cross-sectoral limits for risk concentrations. Exceeding these limits could trigger supervisory intervention directed at controlling situations affecting the viability of the regulated entities of the conglomerate. While supervisors may generally feel they have the powers to seek corrective action by the entity they regulate, actions elsewhere in the conglomerate may be necessary to effectively reduce or mitigate the concentration. Where risk concentrations cut across the regulated entities of the firm, cooperation among the relevant supervisors (as well as with the primary supervisor) is important.

Please refer to items 4.0 and 5.0. RBI has adequate powers to seek corrective action in respect of the banks under its supervision.

Principle

Indian Position

Remarks

1.0 Supervisory strategy with respect to Intra-Group Transactions and Exposures (ITE) in a conglomerate necessarily reflects the powers that the supervisors have to induce financial institutions to control problematic or excessive ITEs and non-arms length transactions. Supervisors should have sufficient authority to gather and safeguard information to enable them to monitor material ITEs across sectors and to observe how ITE-related risks are managed. Supervisors also should have the power to deal with ITEs that are manipulative or abusive, through preventive regulation, such as limits, or remedial action, as necessary. Where supervisors lack sufficient powers, they should seek the additional authority they need.

As indicated in the assessments of compliance with risk concentration principles, the RBI has requisite powers to gather all material information from commercial banks. Although there is no explicit legal provision empowering the RBI to call for information directly from subsidiaries or joint ventures of banks, in practice there has been no constraint in RBI receiving financial and/ or other structured information in respect of any of the transactions between the commercial bank and its down stream and upstream entities. RBI has the necessary powers to direct banks in regard to their ITEs. RBI also has powers to prohibit banks from engaging in ITEs that are manipulative or abusive.

Risk management systems that are being put in place need to take into account the special requirements of ITEs.

1.1 Supervisors should take steps, directly or through regulated entities, to provide that conglomerates have adequate risk management processes in place, including those pertaining to ITEs. Where necessary the supervisors should consider appropriate measures, such as reinforcing these processes with supervisory limits.

Conglomerate structures in India are relatively uncomplicated and simple. RBI has issued general guidelines to banks that all transactions with their subsidiaries/ joint ventures and associates should be on an arms length basis and at market determined rates. The extant risk management guidelines issued by the RBI also addresses exposures to counterparties. There are currently no prudential limits in regard to intra-group transactions excepting prudential exposure limits.

RBI should consider issuing appropriate guidelines requiring banks to ensure that they and their subsidiaries and joint ventures put in place adequate risk management processes covering intra-group exposures as well. It would also be useful to stipulate limits for ITEs on a solo and consolidated basis.

1.2 Supervisory concerns emerging from ITEs, in particular contagion effects, can be mitigated by good internal control policies within the conglomerate. Supervisors should expect that regulated entities will monitor and control ITEs in such a manner that the financial integrity of each regulated entity is protected. Supervisors should take steps directly or through regulated entities to provide that financial conglomerates have controls in place to manage their ITEs. For example, where the supervisor does not consider the controls adequate, or there is evidence of abusive or manipulative activity, supervisors should consider imposing supervisory limits or other measures.

Internal control policies as applicable to normal transactions are also applicable to intra-group transactions. There is no system whereby intra-group transactions in a financial/ banking conglomerate are monitored by supervisors in India. . However, market intelligence is being developed as a source of supervisory information.

In order to more fully comply with best practices in this regard, it is necessary for RBI to issue instructions to banks to ensure that their up-stream and down-stream units have appropriate controls in place in regard to intra-group transactions. To be effective it is preferable to prescribe norms as to permissible types of ITEs and also limits linked to the unimpaired regulatory capital of the bank.

1.3 A sound risk management process for ITEs begins with policies and procedures approved by the board of directors or other appropriate body and active oversight by both the board and senior management. The process should include a unified framework for the measurement and monitoring of material ITEs, so that both sides of bilateral transactions can be analysed at the individual regulated entity level, as well as at the conglomerate level. Comprehensive management information and reporting systems are essential to sound risk management approach. Finally, sufficient attention should be given to non-quantifiable, as well as quantifiable, risks.

This principle is acceptable. The RBI has been proactive in providing guidance to banks in regard to the principles, measurement and management of risks and risk concentrations covering quantifiable and non-quantifiable risks. RBI has also been proactive in urging and motivating the Board of Directors and senior management of banks to exercise oversight on risk management practices and procedures in the bank. However, these do not adequately cover ITEs.

RBI may consider issuing detailed guidelines to banks urging them to formulate and put in place clearly defined policies and procedures, including a unified framework for measurement, monitoring and management of risks associated with ITEs.

1.4 As financial institutions from different sectors merge and financial conglomerates evolve, the potential size, volume and complexity of ITEs increase. When evaluating proposed mergers and expansions, supervisors should take into account management plans to manage material ITEs at a group-wide level.

Assessments of the risk profiles of amalgamating entities on a solo and combined basis is done while evaluating mergers and acquisitions. However, the assessment is not normally extended to explicitly cover plans to manage ITEs at a group-wide level.

2.0 Supervisors should monitor material ITEs of the regulated financial entities on a timely basis, as needed, through regular reporting or by other means to help form a clear understanding of the ITEs of the financial conglomerate.

Refer to item 1.1 to 1.4. Material ITEs are not captured in the supervisory off-site reporting system. These are however, looked into during the on-site inspection process if there frequency and concentration is large enough to attract supervisory concern.

Adequate reporting systems need to be put in place.

2.1 Supervisors should be able to tailor their monitoring of material ITEs based on the nature and scope of the conglomerate’s corporate governance and internal control mechanisms. Supervisors should have access to information or be informed on a regular basis on ITEs, on both a solo and consolidated basis that exceed a set standard rule. This implies that supervisors need to refer to both consolidated and unconsolidated financial statements to properly detect ITEs.

Refer to item 2.0. There are currently no major impediments to the RBI having access to such information on a consolidated as well as disaggregated unit-wise basis, apart from data management standards obtaining in individual banks.

2.2 In instances where the conglomerate contains significant unregulated entities or has an organisational structure very different from its legal entity structure, sound management of ITEs by the regulated entities of the financial conglomerate, and possibly by the financial conglomerate as a whole will be an important concern.

This principle is acceptable. RBI should ensure that material ITEs are effectively monitored through the principle entity falling within its jurisdiction.

2.3 Different approaches to capital regulation and accounting rules in different financial sectors may increase the opportunities for regulatory arbitrage. Supervisors should be especially vigilant in identifying ITEs throughout the financial conglomerate that facilitate such arbitrage.

This principle is acceptable.

2.4 As ITEs evolve, reporting of these transactions must also evolve and take into account new benefits and risks that may be associated with these new structures.

Refer to comments at 2.1.

3.0 Supervisors should encourage public disclosure of ITEs.

ITEs are at present not subject of compulsory public disclosure.

In the interest of effective consolidated supervision and for ensuring due transparency in the dealings between the units of a conglomerate, public disclosure of ITEs should be made compulsory. Suitable regulations as well as accounting principles would need to be put in place to ensure such disclosure.

3.1 Public disclosure of ITEs at the group-wide level can promote market discipline by providing insight into the relationship among the various entities in the conglomerate. Effective public disclosures allow market participants to reward conglomerates that manage risks associated with ITEs effectively and to penalise those that do not, thus reinforcing messages provided by the supervisor. For market discipline to be effective, disclosures need to be timely, reliable, relevant and sufficient. Given the variety of possible ITEs in a financial conglomerate, public disclosure should not simply highlight the volume of ITEs but help the reader of financial statements to gain a greater understanding of the operations of the conglomerate. This no doubt means enhancing disclosures by expanding both the qualitative information, such as scope, significance and management of the conglomerate’s major ITEs, as well as quantitative information. In addition, public disclosure can facilitate supervisory monitoring and risk assessment and lead supervisors to explore further material issues.

While the type of information usually provided in the annual report and management or director’s report to the market or supervisors generally allow these users to arrive at meaningful inferences in regard to financial condition, solvency, earnings performance and brief risk profile, disclosures relating to ITEs are currently not mandatory. RBI currently requires banks to append the financial statements in respect of subsidiaries/ joint ventures along with the financials of the parent unit. RBI may consider requiring banks to also make public not only the variety and volume of ITEs, but also the management’s statement of the purpose and implications of ITEs on a group-wide basis.

4.0 Supervisors should liase closely with one another to ascertain each other’s concerns and coordinate as deemed appropriate any supervisory action relative to ITEs within the group.

We are in agreement with this view. Information sharing between domestic regulatory bodies like Securities and Exchange Board of India (SEBI), National Bank for Agricultural and Rural Development (NABARD), National Housing Bank (NHB), etc, are attended to on mutual understanding. The RBI is also represented on the boards of these bodies. A High level Committee on Capital Markets comprising of Governor of RBI, Chairman of SEBI and Finance Secretary of the Central Government serves as a forum for discussing key regulatory issues of common interest. Cooperation established should also extend to sharing information on material ITEs across jurisdictions.

Supervisors should liaise closely with one another to ascertain each other’s concerns and coordinate as deemed appropriate. Close coordination and liaion between supervisors is a precondition for effective supervision over regulated entities individually as well as over the groups these entities comprise. Mechanisms aimed at ensuring full coordination and free flow of information between different regulators needs to be put in place urgently.

4.1 A better understanding of supervisory methods dealing with ITEs and their rationale will facilitate a group-wide assessment of the difficulties that may be encountered by conglomerates as a result of ITEs. Supervisory concerns associated with cross-jurisdiction and cross-sector ITEs may be mitigated by communication among supervisors.

The range and scope of information exchange among sectoral supervisors as well as the contact levels needs to be made broader and multi-point. It would also be useful to have a structured agenda so that all material issues with cross-sectoral implications receive appropriate attention.

4.2 One of the key considerations influencing the supervisory approach to the regulation of ITEs is the legal structure of the conglomerate in each jurisdiction and country in which the conglomerate has operations. In deteriorating financial scenarios, the liquidation and bankruptcy regimes of each separate legal entity will determine at what point the regulated entity is endangered and will be moved into liquidation or resolution. Supervisors need to be aware that the differences in the bankruptcy/ liquidation regimes exist so that they can anticipate the impact of such regimes on the regulated entities within a troubled conglomerate and coordinate as necessary and where possible with other supervisors.

Bankruptcy and liquidation regimes for commercial entities are uniform across India. However, there are serious implications for cross- border conglomerates.

5.0 Supervisors should deal effectively and appropriately with material ITEs that are considered to have a detrimental effect on the regulated entities, either directly or through an overall detrimental effect on the group.

We are in agreement with this view. At present RBI has not articulated a general approach on how to deal with material ITEs at the group level apart from issuing guidelines to banks to have arms length relationship in their commercial transactions with subsidiaries.

5.1 Most supervisory regimes are designed to prohibit detrimental ITEs. If prohibited transactions occur or if a financial conglomerate is exposed to ITEs that may affect its financial stability, supervisors should take appropriate measures with respect to regulated entities. Examples of supervisory actions include requiring that prohibited transactions be nullified or cease to continue, that the use of ITEs be modified going forward or that they be subject to prudential measures. Supervisors may have to use moral suasion in instances where their powers are lacking to deal with ITEs. Where ITEs cut across the regulated entities of the firm, cooperation among the relevant supervisors (as well as with the primary supervisor) is important.

Please refer to items 4.0 and 5.0. RBI has adequate powers to seek corrective action in respect of the banks under its supervision.

No.

Principle

Indian Position

Remarks

I. General principles governing the supervision of banks’ foreign establishments

i.

Effective supervision between host and parent authorities is a central prerequisite for the supervision of banks’ international operations. In relation to the supervision of banks’ foreign establishments there are two basic principles which are fundamental to such cooperation and which call for consultation and contacts between respective host and parent authorities;

Firstly, that no foreign banking establishment should escape supervision; and

All foreign banking establishments in the country are subject to supervision.

Secondly, that the supervision should be adequate.

Systems are in place and have so far proved to be adequate. In the changing worldwide scenario of banking particularly the integration of markets, there is now a need to strengthen the system further. The first step would be a greater interaction with controlling office (not only the immediately superior office) and the home office regulator. A full understanding of the overall operations of the bank involved is considered necessary.

ii.

In giving effect to these principles, host authorities should ensure that parent authorities are informed immediately of any serious problems which arise in a parent bank’s foreign establishment. Similarly, parent authorities should inform host authorities when problems arise in a parent bank which are likely to affect the bank’s foreign establishment.

This principle has as yet not received universal acceptance amongst regulators in regard to their cross border regulatory obligations. Host authorities in a large majority of cases remain inadequately informed about the parent bank’s current and impending difficulties. A more comprehensive system of information sharing based on mutuality and reciprocity need to be established.

II. Aspects of the supervision of banks’ foreign establishments

1. Solvency

The allocation of responsibilities for the supervision of the solvency of banks’ foreign establishments between parent and host authorities will depend upon the type of establishment concerned.

Supervision of banks in India mainly aims at ensuring the solvency of the banks and their ability to meet their liabilities as and when they arise.

For branches, their solvency is indistinguishable from that of the parent bank as a whole. So, while there is a general responsibility on the host authority to monitor the financial soundness of foreign branches, supervision of solvency is primarily a matter for the parent authority.

While supervising the branches of foreign banks operating in India, RBI looks mainly at the solvency of the branch.

The solvency of the parent bank needs to receive a more pointed attention even if the responsibility to monitor is only general.

For subsidiaries, the supervision is a joint responsibility of both host and parent authorities.

For supervision of subsidiaries of foreign banks which have branches in India as also for subsidiaries of Indian banks abroad, RBI would need to develop a more focussed policy. At present, the supervision of the subsidiary does not seem to attract enough attention of the regulator.

For joint ventures, the supervision should normally, for practical reasons, be primarily the responsibility of the authorities in the country of incorporation.

This is our position as well.

2. Liquidity

Allocation of responsibilities for the supervision of the liquidity of banks’ foreign establishments will depend upon the type of establishment concerned.

Liquidity of branches of banks incorporated abroad and functioning in the country as well as those of Indian bank branches abroad are monitored.

For branches, host authorities will often be best equipped to supervise liquidity as it relates to local practices and regulations and the functioning of their domestic money markets. At the same time, the liquidity of all foreign branches will always be a matter of concern to the parent authorities, since a branch’s liquidity is frequently controlled directly by the parent bank and cannot be viewed in isolation from that of the whole bank of which it is a part. Parent authorities need to be aware of parent banks’ control systems and need to take account of calls that may be made on the resources of parent banks by their foreign branches. Host and parent authorities should always consult each other if there are any doubts in particular cases about where responsibilities for supervising the liquidity of foreign branches should lie.

Foreign banks operating in the country are required to bring in capital funds and minimum CAR is also stipulated for such branches. Systems are also in place whereby RBI can take into account calls that may have to be made by them on their parent banks. This is also periodically monitored. In the case of Indian banks with branches abroad, systems are in place for monitoring liquidity by means of periodical returns.

For subsidiaries, primary responsibility for supervising liquidity should rest with the host authority.

This principle is accepted with the provision that in the case of Indian subsidiaries of foreign banks engaged in activities not coming within the regulatory purview of RBI, the liquidity position of such subsidiaries is not monitored by RBI.

For joint ventures, primary responsibility for supervising liquidity should rest with the authorities in the country of incorporation.

Within the framework of consolidated supervision, parent authorities have a general responsibility for overseeing the liquidity systems employed by the banking groups they supervise and for ensuring that these systems and the overall liquidity position of such groups are adequate.

RBI is, at present, a little away from the stage of consolidated supervision. It needs to move in that direction gradually.

The first step in this direction would be to pay more attention to the operation of subsidiaries even if their accounts are not consolidated with that of the present entity, which is the subject of RBI’s regulation.

3. Foreign exchange operations and positions

As regards the supervision of banks’ foreign exchange operations and positions, there should be a joint responsibility of parent and host authorities.

Internal control guidelines as well as proper reporting systems for foreign exchange operations are in place for both foreign branches of Indian banks and Indian branches of foreign banks.

In so far as supervision of foreign banks’ own exchange operations, as separate from their Indian branches’ foreign exchange operations, is concerned, RBI does not take any supervisory stance. It is considered that it is neither feasible nor necessary to cover the overall angle at this stage. The joint responsibility mentioned in the concordat is taken to mean responsibility in respect of the foreign exchange operations of the branches of foreign banks operating in India.

No.

Principle

Indian Position

Remarks

I. Authorisation

i.

Host authorities should as a matter of routine check that the parent authority has no objection before granting a banking licence.

Before granting permission to a foreign bank for opening a branch in India, prior consent of the parent authority is ensured.

ii.

Where a host authority is unable to obtain a positive response from the parent authority, it should consider either refusing the application, increasing the intensity of supervision or imposing conditions on the grant of authorisation. In the latter case, it is recommended that the conditions (and any subsequent changes in the conditions) should be communicated to the parent authority.

RBI considers it essential to obtain the parent authorities’ consent before allowing any foreign bank to open a branch in India.

iii.

Host authorities should exercise particular caution in approving applications for banking licenses from foreign entities which are not subject to prudential supervision in the parent country of joint ventures for which there is no clear parental responsibility. In such circumstances, any authorisation should be contingent on the host authority’s capacity to exercise a parental role.

The principle is accepted. However, as yet there has been no occasion for RBI to permit opening of a bank in India where due to its joint venture character there is lack of clarity about the parent authority and its supervision over its foreign branches.

iv.

If the host authority follows the procedure outlined in sub-section (i), a parent authority which disapproves of its bank’s plans to establish abroad can recommend the host authority to refuse a licence. Parent authorities nonetheless should ensure that they have taken adequate steps to prevent their banks establishing in unsuitable locations or making inappropriate acquisitions. Where the parent supervisor imposes conditions on a foreign establishment, such conditions should be communicated to the host authority.

Indian banks are not permitted to open any branch abroad without permission of the Reserve Bank. Opening branches or making any acquisition abroad is subject to a thorough appraisal. Conditions imposed on a foreign establishment are communicated to the host authority.

II. Information needs of parent authorities

i.

Host and parent authorities should seek to satisfy themselves that banks’ internal controls should include comprehensive and regular reporting between a bank’s foreign establishments and its head office.

While RBI ensures that the branches of Indian banks abroad are controlled properly by banks’ head offices and that suitable control mechanisms for the purpose are in place, in regard to the quality of control exercised by Head office of foreign banks, whose branches are operating in India, the position is not as unambiguous.

The information flow between the branches (of foreign banks) and the quality of internal control is taken more as a matter between the branch and its HO. The approach is that such internal control is primarily the responsibility of the head office and also on the assumption that any deficiency will be brought to its notice by the bank’s head office as well as the parent supervisor. It is suggested that RBI may increase its reliance on the parent country supervisor and convey to them its expectation about being informed about the extent and quality of control maintained by the head office on its branches operating in India.

ii.

If a host authority identifies, or has reason to suspect, problems of a material nature in a foreign establishment, it should take the initiative to inform the parent supervisor. The level of materiality will vary according to the nature of the problem. Parent supervisors may wish to inform host authorities as to the precise level of materiality which would trigger their concern, for the level of materiality is principally a matter for the parent authority’s judgement. However, the host authority is often in the best position to detect problems and therefore should be ready to act on its own initiative.

System for informing parent supervisor in respect of problems of a material nature is in vogue. However, no specific level of materiality is prescribed or conveyed in advance to host supervisors in respect of foreign establishments of Indian banks.

RBI is not receiving from any of the parent supervisors advices about the levels of materiality which would trigger its concern.

The parent supervisor may define levels of materiality in respect of major financial parameters, the failure to meet with which or the occurrence of certain significant adverse events should be reported by the host supervisor to it.

In order to make this practice effective, we think the two supervisors will need to come to some kind of mutual agreement so that their perception about the triggers identified are common and the manners in which their respective concerns following the appearance of triggers are to be expressed do not vary too much.

iii.

Parent authorities may wish to seek an independent check on data reported by an individual foreign establishment. Where inspection by parent supervisors is permitted, host authorities should welcome such inspections. Where inspection by parent supervisors is not at present possible (or where the parent authority does not use the inspection process), the parent authority can consult the host authority with a view to the host authority checking or commenting on designated features of the bank’s activities, either directly or through the use of the external auditor. Whichever method is chosen, it is important that the results obtained should be available to both host and parent supervisor.

While Indian laws do not prohibit inspection of foreign bank branches by the respective parent supervisor, this is not reciprocated by all countries. The importance of both parent and host supervisor remaining fully informed and exchanging information about the condition of a branch operating abroad is well appreciated.

A country-by-country review would need to be made and appropriate action taken to enter into suitable arrangements with the host country regulation. This should receive urgent attention in relation to those countries which do not permit inspection by the parent country supervisor.

iv.

If serious problems arise in a foreign establishment, the host authority should consult with the head office or parent bank and also with the parent authority in order to seek possible remedies. If the host authority decides to withdraw banking authorisation from a foreign establishment or take similar action, the parent authority should, where possible, be given prior warning.

Systems are in place for consulting with head office / parent bank and also with the parent authority whenever serious problems arise in a foreign bank branch operating in the country.

III. Information needs of host authorities

i.

Parent authorities should inform host authorities of changes in supervisory measures which have a significant bearing on the operations of their banks’ foreign establishments. Parent authorities should respond positively to approaches from host authorities for factual information covering, for example, the scope of the activities of a local establishment, its role within the banking group and the application of internal controls and information relevant for effective supervision by host authorities.

Exchanges of such information between parent and host supervisors suo moto is not quite common. Reserve Bank has, however, been providing the host authorities with all such information that they have sought.

In its own turn, RBI has so far not been seeking much information from the parent authorities of banks operating in India. In certain areas of their operations, particularly about the internal about the internal controls exercised by the concerned head offices of banks, more information is desirable. RBI may consider taking steps in that direction.

ii.

Where a parent authority has doubts about the standard of host supervision in a particular country and, as a consequence, is envisaging action which will affect foreign establishments in the territory concerned, advance consultation is recommended so that the host authority may have an opportunity to correct any inadequacies.

The quality of host supervision differs from country to country.

System of advance consultation with the host/parent supervisors is in vogue.

A periodic review would need to be made of the supervisory systems and standards of host supervision where Indian banks have a presence.

iii.

In the case of particular banks, parent authorities should be ready to take host authorities into their confidence. Even in sensitive cases such as impending changes of ownership or when a bank faces problems, liaison between parent and host authorities may be mutually advantageous.

Parent authorities do not always take the host supervisors into confidence when there are significant events relating to some specific bank, such as impending change in ownership or merger, likely to take place. In the Indian context, this is probably due to the small contribution of Indian operations to the global business of these banks, with the exception of a few.

Greater mutual understanding on the issue would need to be developed amongst the supervisors.

iv.

If a parent authority is intending to take action to protect the interests of depositors, such action should be coordinated to the extent possible with the host supervisors of the bank’s foreign establishments.

Recent developments, particularly those in the South East Asian countries where large scale bank restructuring took place and is still taking place, show that parent authorities are not always following this as a norm.

RBI should insist on such information sharing as one of the terms on which it permits a foreign bank to open its branch in India.

IV. Removal of secrecy constraints

i.

Information received should only be used for purposes related to the prudential supervision of financial institutions. It should not be released to other officials in the recipient’s country not involved in prudential supervision.

Secrecy of supervisory information is ensured.

ii.

The arrangements for transmitting information should be reciprocal in the sense that a two-way flow should be possible, but strict reciprocity in respect of the detailed characteristics of the information should not be demanded.

Sharing of information is reciprocal and need based.

iii.

The confidentiality of information transmitted should be legally protected, except in the event of criminal prosecution. All banking supervisors should, of course, be subject to professional secrecy constraints in respect of information obtained in the course of their activities.

Confidentiality of supervisory information is ensured.

There is perhaps a case for incorporating strict legal provisions in this regard so that supervisory information should not be shared with any agency, including central or state level vigilance/investigative agencies, but only when specifically called for by a court of law.

As a related BIS document states, it needs to emphasised, even in the event of a court demanding supervisory information, that making such information public may result in the drying up of such information and thus adversely affect the quality of supervision in the long run.

iv.

The recipient should undertake, where possible, to consult with the supervisor providing the information if he proposes to take action on the evidence of the information received.

The actual position may vary from case to case. Usually, such consultation with supervisor, after the information has been parted with, does not take place.

Consultation with the supervisor providing the information should be stipulated by law in order to safeguard the integrity and credibility of supervisory system and has relationship of trust between parent and host supervisors.

V. External audit

i.

The existence of adequate provision for external audit should be a normal condition of authorisation for new establishments. It would be advantageous for the audit firm to be one that audits the parent bank, provided the firm in question has the appropriate capacity and experience in the local centre. Where a foreign affiliate is audited by a different firm, the external auditor of the parent bank should normally have access to the audit papers of the affiliate.

Foreign establishments of Indian banks are usually submitted to an external audit in the host country. Similarly, foreign bank branches in India are submitted to external audit.

Audit reports of Indian bank branches are available to the auditors of the parent bank.

ii.

Supervisors have an interest in the quality and thoroughness of audit. In the case of audits that are inadequately conducted, supervisors should address criticism to the local representative body of auditors and should be empowered, where necessary, to have the auditor replaced. As a means of raising auditing standards for international banks, internationally qualified auditors with experience of banking audit in the country concerned should be appointed. Where any doubt arises, host and parent authorities should consult.

In case of problems with quality and thoroughness of audit, RBI takes up with representative body of auditors. Systems are also in place for changing auditors and ‘resting’ them for a period in cases of noticeable deficiencies. The present arrangement in this regard is considered adequate.

iii.

External auditors may also be asked to verify the accuracy of reporting returns or compliance with any special conditions. It is recommended that all supervisory authorities should have the ability to communicate with banks’ external auditors and vice versa. Any emphasis on the role of external auditors should, however, in no way be such as to as downgrade the need for sound internal controls, including provision for effective internal audit.

RBI at present is not normally following the practice of asking external auditors to verify the accuracy of reporting returns or compliance with any special conditions.

RBI could supplement its own supervisory mechanism by making it a regular practice of using external auditors to look specially in certain selected areas and report to it independently.

No.

Principle

Indian Position

Remarks

1.

All international banking groups and international banks should be supervised by a home country authority that capably performs consolidated supervision

RBI’s present position in this regard is to take a consolidated view of banks’ operations without insisting on consolidation of its accounts with subsidiaries. It leaves it to the respective regulators of the subsidiaries to address the concerns arising out of their operations unless it believes that these will impact the operations of the parent bank very adversely. Going by the same logic, it also does not insist on consolidated supervision of banks which have branches in India, by the home country supervisor.

While RBI has found the present arrangement workable, the position is likely to change quite fast. Indian corporates including banks will be required to submit themselves to consolidated accounts and the supervisor too will insist on consolidated supervision. RBI should also begin encouraging Indian banks and foreign entities operating in India to submit to consolidated supervision.

2.

The creation of a cross-border banking establishment should receive the prior consent of both the host country supervisory authority and the bank’s and, if different, banking group’s home country supervisory authority

RBI is presently not insisting on separate approvals of the home country supervisors of a foreign bank for every new branch which it wants to open in India. Such approvals are also not insisted upon from the home country supervisor of the banking group (where the bank is part of a banking group and the banking group’s home country is different from the home country of the bank).

RBI needs to consider the desirability of following the recommended approach.

3.

Supervisory authorities should possess the right to gather information from the cross-border banking establishments of the banks or banking groups for which they are the home country supervisor

The principle is acceptable.

Provision of unhindered/ unqualified access to information to the home supervisor may be made a condition for permitting a bank to open offices abroad.

4.

If a host country authority determines that say one of the foregoing minimum standards is not met to its satisfaction, that authority could impose restrictive measures necessary to satisfy its prudential concerns consistent with these minimum standards, including the prohibition of the creation of banking establishments

RBI has the power to impose restrictive measures including the prohibition of the creation of a banking establishment. In the event of any condition not being met to its satisfaction it can always impose a restrictive measure it chooses.

No.

Principle

Indian Position

Remarks

i.

In order to exercise comprehensive consolidated supervision of the global activities of their banking organisations, home supervisors must be able to make an assessment of all significant aspects of their banks’ operations that bear on safety and soundness, wherever those operations are conducted and using whatever evaluative techniques are central to their supervisory process.

RBI’s supervisory stance is aimed at exercising comprehensive and consolidated supervision of the global activities of the Indian banks. However, in this regard it faces constraints in countries where the local laws do not permit the home supervisor to conduct on-site inspection/examination of records.

There is no legal or other hindrance to parent supervisors from other countries conducting such inspections of Indian branches of banks under their supervisory jurisdiction.

A country-wise analysis will have to be made and suitable action taken to address the constraints.

ii.

Home supervisors need to be able to verify that quantitative information received from banking organisations in respect of subsidiaries and branches in other jurisdictions is accurate and to reassure themselves that there are no supervisory gaps

In regard to the quantitative information received from banks in respect of their branches abroad, RBI depends upon the banks providing this information for their accuracy. Such cross checks as are there are also based on the information available from the banks themselves as RBI does not consider it necessary to collect any independent information for reassuring itself that there are no supervisory gaps. At present, the foreign operations of all Indian banks constitute a small part of their total operations, say, less than 20 per cent and therefore the current methodology is considered acceptable.

iii

While recognising that there are legitimate reasons for protecting customer privacy, the working group believes that secrecy laws should not impede the ability of supervisors to ensure safety and soundness in the international banking system

We are in agreement with the view. Where safety and soundness in the international banking system is likely to come in question, customer privacy should have to lose priority.

iv.

If the home supervisor needs information about non-deposit operations, host supervisors are encouraged to assist in providing the requisite information to home supervisors if this is not provided through other supervisory means. The working group believes it is essential that national legislation that in any way obstructs the passage of non-deposit supervisory information be amended.

We are in agreement with the view. In India there is no legislation at present obstructing passage of non-deposit supervisory information either to the parent office or to the home supervisor of the branches of foreign banks.

v.

Where the liabilities side of the balance sheet is concerned, home supervisors do not routinely need to know the identity of individual depositors. However, in certain well-defined circumstances, home supervisors would need access to individual depositors’ names and to deposit account information.

We are in agreement with this view subject to a prior mutual agreement as regards what are "well-defined circumstances" in which the home supervisor would need access to individual depositor names and account information. Customer privacy cannot be easily and routinely compromised as it can have serious implication on the banking system. For this arrangement to work it will have to be the basis of mutuality between home and host supervisors and all supervisors would need to agree to it.

vi.

It should not normally be necessary for the home supervisor to know the identity of investors for whom a bank in a host country is managing investments at the customer’s risk. However, in certain exceptional circumstances, home supervisors would need access to individual investors’ names and to investment account information subject to the safeguards in paragraph 10.

Our views on the issue are the same as in the case of item (v).

vii.

The working group recommends that host supervisors whose legislation does not allow a home supervisor to have access to depositor information use their best endeavours to have their legislation reviewed and if necessary amended to provide for a mechanism whereby in exceptional cases a home supervisor, with the consent of the host supervisor, will gain access to depositor information subject to the same conditions as outlined in (viii) below.

No such restrictions exist in the country.

Laws in India at present do not debar the sharing of depositor information by a branch of foreign bank with its parent office or the home supervisor.

viii.

In order to provide legitimate protection for bank customers, it is important that the information obtained by home supervisors especially that relating to depositors’ or investors’ names, is subject to strict confidentiality. The working group recommends that those host jurisdictions whose legislation allows foreign supervisors to have access to banks’ depositor or investor information should subject such access (at the host country’s discretion) to the following conditions

• the purpose for which the information is sought should be specific and supervisory in nature;
• information received should be restricted solely to officials engaged in prudential supervision and not be passed to third parties without the host supervisor’s prior consent;
• there is assurance that all possible steps will be taken to preserve the confidentiality of information received by a home supervisor in the absence of the explicit consent of the customer;

We are in agreement.

RBI is at present not specifying such conditions. It may consider stipulating these conditions whenever foreign supervisors are to be given access to bank’s depositor or investor information.

• there should be a two-way flow of information between the host and home supervisors, though perfect reciprocity should not be demanded.

We do not see any reason why perfect reciprocity should not be demanded. In fact, it is felt that without an understanding of perfect reciprocity it would be difficult to put such an arrangement in place.

• Before taking consequential action, those receiving information will undertake to consult with those supplying it.

Such consequential action shall only be supervisory and prudential.

ix.

If a host supervisor has good cause to doubt a home supervisor’s ability to limit the use of information obtained in confidence solely for supervisory purposes, the host would retain the right not to provide such information.

It is not quite clear how this provision can coexist with the provision suggested earlier that secrecy laws should not impede the ability of the supervisors to ensure safety and soundness in the international banking system. (Item (iii) above).

Also, without objective reciprocity on the issue of sharing information between supervisors, information flow may become very uneven making cross-border supervision difficult.

x.

Subject to appropriate protection for the identity of customers, home supervisors should be able at their discretion, and following consultation with the host supervisor, to carry out on-site inspections in other jurisdictions for the purposes of carrying out effective comprehensive consolidated supervision. This ability should include, with the consent of the host supervisor and within the laws of the host country, the right to look at individual depositors’ names and relevant deposit account information if the home supervisor suspects serious crime as defined in section (d). If a host supervisor has reason to believe that the visit is for non-supervisory purposes, it should have the right to prevent the visit taking place or to terminate the inspection.

The Group is in agreement with this view.

xi.

It would avoid potential misunderstandings if a standard routine were laid down for conducting cross-border inspections along the lines recommended.

Standard routine is not implemented as of now. Nor is it demanded of parent supervisors inspecting branches in India. A standard routine for conducting cross-border inspection as proposed would be difficult.

xii.

In those countries where laws do not allow for on-site inspections use their best endeavours to have their legislation amended. In the meantime, host supervisors should, within the limits of their laws, be willing to co-operate with any home supervisor that wishes to make an inspection. The working group believes that the host supervisor should have the option to accompany the home supervisor throughout the inspection.

We agree. Inspections by the home supervisors are not impeded in any way in India.

xii.

It is important that the confidentiality of information obtained during the course of an inspection be maintained. Home supervisors should use their best endeavours to have their legislation modified if it does not offer sufficient protection that information obtained for the purposes of effective consolidated supervision is limited to that use.

We agree. However, the present legal provisions in India in respect of confidentiality of information available with the home supervisor (RBI) do not seem to be providing sufficient protection of information. More clearly defined laws would be needed for this purpose.

xiv

In the event that a home supervisor, during an on-site inspection in a host country detects a serious criminal violation of home country law, the home supervisor may be under a strict legal obligation to pass the information immediately to the appropriate law enforcement authorities in its home country. In these circumstances, the home supervisor should inform the host supervisor of the action he intends to take.

We agree.

xv.

In order to carry out effective comprehensive consolidated supervision, home supervisors also need information on certain qualitative aspects of the business undertaken in other jurisdictions by branches and subsidiaries of banking organisations for which they are the home supervisor. All members of the working group agree that it is essential for effective consolidated supervision that there are no impediments to the passing of such qualitative information to the home supervisor.

There is no restriction in India for passing on such information to other country supervisors regarding the branches of banks under their jurisdiction.

A country-wise analysis will have to be made to ensure reciprocity in this arrangement.

i.

In the case of information which is specific to the local entity, an early sharing of information may be important in enabling a potential problem to be resolved before it becomes serious. The home supervisor should therefore consult the host supervisor in such cases and the latter should report back on its findings. In particular, it is essential that the home supervisor inform the host supervisor immediately if the former has reason to suspect the integrity of the local operation, the quality of its management or the quality of internal controls being exercised by the parent bank.

We are in agreement with this view. This arrangement is likely to improve supervisory efficiency.

ii.

A home supervisor should have on its regular mailing list for relevant material all foreign supervisors which act as hosts to its banks.

This may not be necessary as it could lead to much flow of sparingly needed information between the supervisors. Any information, wherever required is likely to be available on demand or already made public by the concerned supervisor, e.g., on their web sites.

iii.

While the working group agrees that home supervisors should endeavour to keep host supervisors apprised of material adverse changes in the global condition of banking groups, the Group recognises that this typically be a highly sensitive issue and that decisions on information-sharing necessarily will have to be made on a case-by-case basis.

There cannot be a settled principle on this since it has to be decided on a case-by-case basis.

i.

The working group has formulated a set of principles of effective consolidated supervision which could be used by host supervisors as a checklist to assist in determining whether a home supervisor is meeting the Minimum Standards.

The checklist provided by the working group can act as a good tool for assessing the capabilities of any supervisor to exercise consolidated supervision. However, any assessment of this nature can become arbitrary and lead to considerable difference of opinion between the host and home supervisors. Unless, therefore, there is a general consensus amongst all supervisors on the scope and methodologies of exercising consolidated supervision and until there is an agreement between most supervisors on its acceptance as the common mode of supervision, this approach if insisted upon could become counterproductive.

The principle of consolidated supervision is unexceptionable. Reserve Bank needs to move in that direction. The accounting standards as well as the regulatory provisions need to be reviewed from this angle. A major obstacle in this regard which is faced by us is multiplicity of regulators on mutually exclusive basis. A suitable mechanism to coordinate their approaches shall have to be found.

ii.

Regional group procedures might be used to support the implementation of the Minimum Standards, as the Offshore Group is now doing.

Our views are as expressed in regard to item xix.

iii.

The working group recommends that other regional groups consider the possibility of using a checklist similar to the one used by Offshore Group as a means of establishing which of their members might be certified as meeting certain general criteria.

Our views are as expressed in regard to item xix.

iv.

The Basel Committee encourages its member countries to assist the Offshore Group or another regional group in the fact-finding verification process, but any decision-making regarding membership of a regional group should be left to the group alone. The Committee has asked its Secretariat to maintain a list of competent persons (for example, retired supervisors) who are available to undertake exercises of this nature.

No comments.

v.

The supervisor that licenses a so-called shell branch has responsibility for ensuring that there is effective supervision of that shell branch. No banking operation should be permitted without a licence, and no shell office should be licensed without ascertaining that it will be subject to effective supervision. In the event that any host supervisor receives an application to license a new shell branch that will be managed in another jurisdiction, that supervisor should take steps to notify both the home supervisor and the appropriate host supervisor in the other jurisdiction in order to establish that there will be appropriate supervision of the branch before approving the application.

RBI’s position on these issues is the same as stated in the BIS document. It does not permit any banking operations without a licence. It also does not allow opening of any kind of branch of an Indian bank, unless it is satisfied that the branch will be subject to effective supervision.

vi.

Home supervisors should not authorise their banks to establish or acquire offices in any host jurisdiction without satisfying themselves in advance that such offices will be subject to appropriate supervision.

This is being ensured while granting permission for opening of branches abroad.

vii.

Where the home authority wishes to inspect on-site, they should be permitted to examine the books of the shell branch wherever they are kept. The working group believes that in no case should access to these books be protected by secrecy requirements in the country that licenses the shell branch.

We are agreeable to this suggestion.

viii.

The working group recommends that home or host supervisors be vigilant to ensure that parallel-owned banks (where a bank in one jurisdiction has the same ownership as a bank in another jurisdiction, where one is not a subsidiary of the other) become subject to consolidated supervision, if necessary by enforcing a change in group structure as indicated by the Minimum Standards.

We are in agreement with this suggestion.

ix.

Any home supervisor that licenses a banking entity has a responsibility to monitor its operations on a worldwide basis.

This is being ensured.

x.

No entity should be allowed to use the word "bank" in its name if it is not conducting banking activities and being supervised as a bank.

This is provided for in law.

xi.

The working group believes the Basel Committee should advise all host countries to be extremely cautious about approving the establishment of cross-border operations by banks incorporated in under-regulated financial centres, and even more cautious about accepting other financial institutions conducting banking activities from those centres.

RBI's approach on these issues is in line with the thinking of the working group.