Risk Based Supervision

The Way Ahead

Background
1993

Basel I accord : RBI mandated 9% CRAR instead of 8%

1996

2002

Liquidity included in CACS : Rating factor for foreign banks

2007

Basel II (Minimum Capital Charge, Supervisory Review, Market

Discipline)

2012

2013

S. Padmanabhan Committee recommends six rating factors

CAMELS

HLSC led by Dr Chakrabarty recommends Risk Based

Supervision for Pillar 2

Implementation for Basel III begins, to be fully implemented by 2019

What is Risk Based Supervision

(RBS)?
Identify those banks in which risks are
greatest
Identify, within such banks, those areas in which risks
are greatest
Apply scarce supervisory resources so as to minimize the overall
regulatory risk

RBS is a supervisory mechanism by the regulator

to differentiate the banks on the basis of their risks
and apply its scarce regulatory resources,
to monitor and control the banks where the risks are
high

What is Risk Based Supervision

(INROADS)?
Probability of

Bank Profiling

Risk Assessment

Inspection Report

On-Site Inspection

Baseline & Plan

& MAP

& SREP

Corrective Actions

Thematic Review

Supervisory Rating

Stress Testing &

Reverse Stress Test

Failure

Impact of Failure

Planned
Supervisory
Activities

Continuing Off-Site
Supervision

What is Risk Based Supervision

(INROADS)?
Rule Based
Supervision
(CAMELS)

Risk Based
Supervision
(INROADS)

Backward-Looking

Forward-Looking

One-Size fits it all

Proportionate

Insensitive to limited
Supervisory resources

Maximizes the usage of

limited supervisory resources

Transaction Oriented

Process and outcome

oriented

Static, Point-In-Time
Assessments
Reactive

Dynamic, continuous
assessments

Based on compliance

Pro-active, preventive

Avoids risks by forcing hard

rules

Principles based
Focus on risk control and

Key Changes due to RBS

Regime
Continuous collection of financial and non-financial data
Assess risks and determine the probability and impact of failure
Onsite supervision based on the risk profile
Onsite inspection : once every 3 years for less risky banks
whereas yearly review for vulnerable banks
Increased responsibility
compliance functions

with

penal

actions

on

audit

and

Enforcement of additional capital infusion based on assessments

Ensure good corporate governance, transparency and accuracy of
information

Key Challenges for the Banks

To revamp the risk measurement process for present and future
risks
To strengthen Early Warning System for detection of key risks
To manage and support on-site reviews conducted by RBI
To support the regular dialogue between the top management of
the bank and supervisor with updates data and controls for high
risk areas
To strengthen
Quality and availability of data,
Scalability of regulatory reporting processes,
Efficacy of risk management systems
Cost of compliance

Proposed Roadmap to Banks

Data
Establish
consistency in data
definitions
Map data fields to
Source System
Validate data to be
provided to RBI
Reconciliation of
RBS data with
financial reporting
and other
regulatory reporting
data
Automation of data
flows from source
system to
supervisor and
integration with

Controls
Establish
compliance
framework &
testing unit
Develop specialist
to conduct reviews
for high-risk areas
Monitor regulatory
action plan
Re-engineer the
internal and
concurrent audit
plans and
expectations
Embed operational
controls in IT
systems and as a
part of audit testing

Risk Management

Governance

Align ICAAP
document with
SREP expectations

Multi-level
management
dashboards

Enterprise wide risk

quantification and
aggregation

Demonstrable use of
risk models in the

Capital and liquidity

planning and
allocation incl.
contingency
planning
Ongoing validation
of risk models to
derive assurance
over risk
quantification
Integrated stress
testing and impact

decision making
process
Quality of
governance and
oversight incl.
managing conflicts
of interest
Continuous
monitoring of
qualitative factors
and demonstrable
risk culture
Demonstrating that
capital after

Thank you