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RBI group moots setting up of primary regulator

An advisory group constituted by the Reserve Bank of India has recommended that the apex bank should 'urgently consider' setting up of a primary regulator with clearly assigned roles and responsibilities to co-ordinate between different regulators in the country.

The group after examining the present practices has found that certain urgent changes are necessary in areas of corporate governance, internal control systems and management of risks, RBI said in a release in Bombay on Wednesday.

One of the important recommendations made by the group in respect to corporate governance was related to the constitution of bank boards and their accountability.

"It should be same in all types of banking organisations irrespective of their ownership," the group said.

There was some overlap in RBI's role as owner/owner's representative and as regulator/supervisor, which should be corrected, the group suggested.

"Government ownership of banks was not conducive to any serious and urgent corrective action by the regulator," it said in its May 29 report on banking supervision.

The bank boards should modify their approach towards internal controls to have a firmer say in their maintenance and improvement of internal control systems. Discussions between management-boards on quality of internal controls should be institutionalised, the RBI group recommended.

The group said given the level of complexity and development of Indian banking sector, the level of compliance with the standards and codes was of a high order.

On core principles, the advisory group said the apex bank should gradually move towards setting bank specific capital ratios based on their individual risk profiles.

The public sector character of the banks remains an important consideration. The group added that the RBI should consider introduction of measures by which clear accountability could be fixed on individual directors and/or the board for non-performance and/or negligence of their duties.

Advanced risk management capabilities must be in place in all banks latest by March 31, 2003 and the apex bank may assist banks in hastening introduction of scientific risk management systems, it added.

A more formal and rigorous assessment of boards' performance must be undertaken by the regulator, which should adopt rating of the boards' performance with the provision that if the rating falls below a certain specified level prompt corrective action should be triggered, it said.

The group said RBI should consider moving over to a risk-based approach to supervision as early as possible and also introduce meeting with banks' boards and external auditors.

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