IMF-World Bank: India – Basel Core Principles for Effective Banking Supervision – Detailed Assessment Report

RBI welcomes the comprehensive review of banking regulation and supervision in India done with respect to the highest international standards, by the joint IMF-World Bank team. The Detailed Assessment Report (DAR) recognised that India made considerable progress towards developing a stable financial system through improvements in the legal, regulatory and supervisory framework, which led India to be less affected by the global financial crisis. It added that Indian financial system™s vulnerabilities appeared manageable.

The assessment, however, identifies several gaps and constraints in the implementation of regulatory and supervisory framework. These include international and, to a lesser extent, domestic supervisory information sharing and cooperation, consolidated supervision of financial conglomerates, higher large exposure limits for group borrowers and some limits on the independence of the Reserve Bank.

Since the assessment, Reserve Bank has made significant progress regarding supervisory information sharing and cooperation with jurisdictions where Indian banks are operating. Reserve Bank has entered into Memorandums of Understanding (MoUs) on Supervisory Co-operation and Exchange of Information with 16 overseas jurisdictions where Indian banks have significant presence. Correspondence is in progress with another 28 jurisdictions to finalise mutually agreeable MoUs. Inspection of Indian banks in five overseas jurisdictions covering almost 60 per cent of the total overseas assets of Indian banks was undertaken last year. Inspection of Indian banks in six other overseas jurisdictions covering another 20 per cent of the total overseas assets of Indian banks is currently in progress. The Reserve Bank had also hosted supervisory colleges for State Bank of India and ICICI Bank Limited. Proposals are also under consideration to set up supervisory colleges for two more globally active Indian banks. The Financial Stability and Development Council (FSDC), under the chairmanship of the Finance Minister, serves as the apex forum for effective regulatory coordination. A Sub-Committee of the FSDC, under the chairmanship of the Reserve Bank Governor, provides the next layer of co-ordination on a more frequent basis. To streamline and further strengthen the statutory framework and address regulatory overlaps, the Financial Sector Legislative Reforms Commission (FSLRC) has made recommendations that are under the consideration of the Government of India.

There has also been significant progress regarding supervision of financial conglomerates and monitoring of corporate indebtedness with the amendment of Section 29A of Banking Regulation Act in December 2012. With this amendment, the Reserve Bank is now empowered to effect an inspection of any associate enterprise of a banking company jointly by one or more officers of the Reserve Bank along with the respective regulatory authority. Efforts are also underway to strengthen consolidated supervision of identified financial conglomerates under the aegis of the Inter-Regulatory Forum (IRF), as a sub-group of the FSDC Sub-Committee. To enable the IRF to have an institutional mechanism for periodic co-ordination on supervisory related issues and enable the lead regulators to effectively discharge their duties towards consolidated supervision of identified financial conglomerates, an MoU for facilitating data/information sharing and formalising other co-operation arrangements like coordinated inspection, recovery and resolution planning, etc., has been signed by Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) under the aegis of the Sub-Committee of the FSDC.

The Reserve Bank is aware that the group borrower limit in India is higher than international norms. This deviation is on account of the development needs of the country. Some of the major corporate groups are key drivers of growth, and keeping the group borrower limit at levels comparable to the international practice would constrain the bank finance and hamper growth. Further, once the Basel Committee on Banking Supervision (BCBS) releases the report of Large Exposure Group (LEG), which will set the standards and harmonise the current varying practices in countries, a medium-term action plan for aligning the large exposure norms with international best practices as suitable to Indian conditions will be explored.

Regarding the moral hazard posed by the presence of Reserve Bank™s nominee director on the banks™ board, the matter has been taken up with Government of India for amendment of the enabling legal provision. As regards Reserve Bank™s autonomy from Government, it is felt that it has de facto autonomy, even as it does not have de jure independence.

In India, banking regulations are completely ownership neutral and the same level of scrutiny is applied to all banks. Foreign banks have the same amount of freedom as domestic banks (except regarding expansion) and are treated at par with domestic banks for prudential purposes. Reserve Bank does not consult the government while imposing penalty on public sector banks, and places it in public domain as it does for other banks.

Finally, the Reserve Bank recognises the importance of FSAP in promoting financial stability, even as it may differ on some aspects. Reserve Bank is committed to meet the best international practices that are appropriate for India. Reserve Bank wishes to express its support for the role FSAP would play in future in promoting the soundness of global financial system and looks forward to a continuing dialogue with the IMF/World Bank and other global counterparts in seeking to improve the stability and effective supervision of the global financial system.


In 2011-2012, a Financial Sector Assessment Program (FSAP) for India was conducted by a joint IMF-World Bank team and thereport prepared in the context of that assessment was published in January 2013. IMF has released the Detailed Assessment Report (DAR) on Basel Core Principles for Effective Banking Supervision today.

Tags: Banking in IndiaBasel Committee on Banking SupervisionFinancial Sector Legislative Reforms CommissionFinancial Stability and Development CouncilIndiaInsurance Regulatory and Development AuthorityReserve Bank of IndiaState Bank of India

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