RBI discharges the responsibility of supervising the Indian banking system under Banking Regulation Act, and RBI Act, 1934 through the Department of Banking Supervision (DBS) through its 16 Regional Offices.

Set up

The Board for Financial Supervision (BFS) the apex body, came into existence under RBI`s (BFS) Regulation 1994 u/s 58 of RBI Act, wef Nov. 16, 1994. (Governor – RBI is Chairman and Deputy Governors are ex-officio members and 4 directors from the central Board of RBI are co-opted as members). W.e.f. 1.4.2011, it has been reorganized as Financial Conglomerate Monitoring Division of RBI.

Instruments Of Supervision

The main instrument of supervision in India is the periodical on-site inspection of banks that is supplemented by off-site monitoring and surveillance. Since 1995, on-site inspections are based on CAMELS (Capital adequacy, asset quality, management, earning, liquidity and systems and controls) model and aim at achieving the following objectives:

i) Evaluation of bank’s safety and soundness,

ii) Appraisal of the quality of Board and top management,

iii) Ensuring compliance with prudential regulations,

iv) Identifying the areas where corrective action is required to strengthen the bank

v) Appraisal of soundness of bank’s assets,

vi) Analysis of key financial factors such as capital, earnings, and liquidity and determine bank’s solvency,

vii) Assessment of the quality of its management team and evaluation of the bank’s policies, systems of management, internal operations and control, and

viii) Review of compliance with banking laws and regulations as well as supervisory guidance conveyed on specific policies.

Types of supervision:

It is on-site supervision (through inspection of banks by RBI u/s 35 of B.R Act) and off-site supervision (through 11 DSB returns introduced wef April 01, 1996).

Rating of Banks

RBI`s 1995 Working group heated by Sh. S Padmanabhan suggested method for rating of banks by RBI.

CAMELS Rating for Domestic Banks

C Capital adequacy ratio
A Asset quality
M Management Effectiveness
E Earning (i.e.profitability)
L Liquidity (asset – liability management)
S System and controls

Each of these 6 components is weighed on a scale of 1 to 100 and contains several sub-parameters with individual weightage.

Rating symbols – Domestic Banks

Rating criteria: RBI rates the banks on a 5 point scale of A to E, widely on the lines of international CAMELS rating model for domestic banks and CALCS model for foreign banks.

The rating symbols A to E indicate as under:

A Basically sound in every respect.
B Fundamentally sound but with moderate weakness.
C Financial, operational or compliance weakness that give cause for supervisory concern.
D Serious or immoderate finance, operational and managerial weakness that could impair future viability.
E Critical financial weakness that render the possibility of failure high in the near term.

 Rating parameters for foreign banks

C Capital adequacy ratio
A Asset quality
L Liquidity
C Compliance
S System and controls