banks supervision by regulatory authorities

8/3/2019 Banks Supervision by Regulatory Authorities

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Objective:

To enhance my knowledge on the concept of Supervision by

Regulatory Authoritiesand, its significance & future prospectus with

respect to Banks.

Executive summary

In recent years, there has been a change in banking supervisors

reliance on audited information and in the nature of the major external audit

firms. Concerns about the risk of audit failures, the global expansion of the

major audit firms, increased complexity of both accounting standards and

financial instruments, and the challenges associated with fair value

estimation processes, which have been amplified by the current market

crisis, have reinforced bank supervisors need to be confident of audit

quality. This paper describes the Basel Committee on Banking Supervisions(the Committee) understanding of these circumstances and steps it intends

to take regarding key findings. The current market turmoil and demand for

increased transparency suggests that reliable, clear financial information

supported by quality audits are key elements in enhancing market

confidence.

Bankers and supervisors reliance on external auditors expertise andjudgments has increased

Most of the worlds banking assets are audited, and supervisors are

increasingly reliant on high-quality bank audits to complement supervisory

processes


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An Introduction to Banking

Before we begin, let us all know what is banking after all?

A bank is afinancial intermediary that accepts deposits and channels

those deposits into lendingactivities, either directly or throughcapital

markets. A bank connects customers with capital deficits to customers with

capital surpluses.The most common type of bank account is a savings account. A savings

account is meant to be like a safe: you keep your money in there for the

sole purpose of security. Every bank has different saving account interest

rates and finding one with a high rate will benefit you greatly.

The other type of account that is most commonly used is a checking

account. A checking account does not earn any interest and is mainlyused for convenience. Accessing money in a checking account is easier than

money in a savings account, because you can access it directly from a

multitude of locations such as bars, movie theaters, etc. Also after opening a

checking account you should receive a debit card, which can be used like a

credit card/ATM card, but it will only allow you to use as much funds as

you have in the account.
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The banking sector is an integral part of the economy. Hence this sector

plays a key role in the wellbeing of the economy. A weak banking sector not

only jeopardizes the long-term sustainability of an economy,

It can also be a trigger for a financial crisis which can lead to economic

crises. The adverse outcomes of weak financial systems and their impact on

economic well-being brought about renewed interest within the international

financial community.

Risk managementwhich is often used as a synonym of Asset and

Liability Management, the practice of appraising and controlling risk, has

evolved as a discrete field of study and practice.
http://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Risk_management


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The Banking Sector in India

The Banking sector in India has always been one of the most preferred

avenues of employment. In the current decade, this has emerged as a

resurgent sector in the Indian economy. As per the McKinsey report India

Banking 2010, the banking sector index has grown at a compounded

annual rate of over 51 per cent since the year 2001, as compared to a 27

per cent growth in the market index during the same period. It is projected

that the sector has the potential to account for over 7.7 per cent of GDP with

over Rs.7,500 billion in market cap, and to provide over 1.5 millionjobs.

Today, banks have diversified their activities and are getting into new

products and services that include opportunities in credit cards, consumer

finance, wealth management, life and general insurance, investment

banking, mutual funds, pension fund regulation, stock broking services,

custodian services, private equity, etc. Further, most of the leading Indian

banks are going global, setting up offices in foreign countries, by themselves

or through their subsidiaries.


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CHALLENGES

Competition In Retail Banking:

The entry of new generation private sector banks has changed the entire

scenario. Earlier the household savings went into banks and the banks then

lent out money to Corporates. Now they need to sell banking. The retail

segment, which was earlier ignored, is now the most important of the lot, with

the banks jumping over one another to give out loans. The consumer hasnever been so lucky with so many banks offering so many products to

choose from. With supply far exceeding demand it has been a race to the

bottom, with the banks undercutting one another. A lot of foreign banks have

already burnt their fingers in the retail game and have now decided to get out

of a few retail segments completely.

The nimble footed new generation private sector banks have taken a lead on

this front and the public sector banks are trying to play catch up.

The PSBs have been losing business to the private sector banks in this

segment. PSBs need to figure out the means to generate profitable business

from this segment in the days to come.

As Keynes wrote, Worldly wisdom teaches us that its better for

reputation to fail conventionally than succeed unconventionally.

Banks should avoid falling into this trap.


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RISKS

Interest rate risk

Interest rate riskarises from any unmatched forward foreign exchangepositions the bank may have. (The only true foreign exchange risk incurred

here is the difference between the spot and forward trade in each currency.

Should a bank buy spot Sterling against US Dollars and sell the identical

amount of Sterling, say 3 months forward, the foreign exchange risk is thedifference between the spot and forward US Dollar amounts. However, the

bank will have a long GBP, short USD forward foreign exchange position. A

movement of interest rates in either of these currencies over the period of

the forward trade will generate a revaluation profit or loss). Although interest

rate markets are not as volatile as foreign exchange, it is important that

banks measure and monitor all risks.

Foreign exchange risk

Foreign exchange risk positions arising from a banks profit and loss

account are more difficult to assess accurately. However those banks with

material profit flows in foreign currency should carry out an assessment as to

the benefits of hedging their risk. As such foreign exchange risk will normally

emanate from outside the treasury area and, as a matter of best practice, the

decision to hedge or not should be taken at a minuted Management or ALCO

meeting.


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Liquidity Risk

Liquidity risk is the current and prospective risk to earnings or capital

arising from a banks inability to meet its obligations when they come due

without incurring unacceptable losses. Liquidity risk includes the inability to

manage unplanned decreases or changes in funding sources. Liquidity risk

also arises from the failure to recognize or address changes in market

conditions that affect the ability to liquidate assets quickly and with minimal

loss in value.

Credit risk

A rising from the failure or default of counterparty. Technically, this is acredit risk where only one side of the transaction has settled (see settlement

risk above). If counterparty fails before any settlement of a contract occurs,

the risk is limited to the difference between the contract price and the current

market price (i.e. an exchange rate risk).


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Need for Regulation and Supervision of Banks

No one should have a more intense concern for both the profits and

safety of a bank than its own shareholders. That is being the case, how can

nonmarket governmental supervisors be any better at evaluating a complex

banking organ-inactions risk exposures and need for capital than the

managers of that organization itself? One reason why banking regulation and

supervision are necessary is to redress moral hazard. In most countries,

banks are protected by government safety nets, typically including a lender-

of-last-resort facility and/or deposit insurance. Safety nets can produce

suboptimal market results by inflating banks incentives to take risk. Banking

regulation and super-vision must replace the market discipline removed by

the safety net. Second rationale at least in the case of Federal Reserve

banking supervision is that a Reserve bank carries on banking business,

requiring careful attention to its own counterparty risk exposures. Each

business day banks in this country make about $1 trillion in payments to one

another. A substantial share of these involves near-instantaneous,

irrevocable wire transfers of funds by the Reserve banks for their bankingcustomers. In order to fund the wire transfers, the Reserve banks extend

some-thing like $100 billion of daylight credit. They must manage their

resulting risk exposure to protect themselves from any loss that would result

if a customer bank were to fail without having repaid its daylight borrowing.

Managing this exposure involves monitoring the credit quality of their

customer banks and supervising their adherence to capital-adequacy

requirements.


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Role of Regulatory Authorities

Regulatory Authorities play an important role in regulating and

controlling the activities in specialized areas. These regulatory authorities

have been created by the Government of India under different Acts. They

regulate the activities through the rules & regulations or guidelines issued

from time to time. The Securities and Exchange Board of India was

established by the Government under the SEBI Act, 1992. The Act has given

wide powers to SEBI to regulate and control the capital market in market.

The Reserve Bank of India Act1935 had given powers to RBI to regulate and

control the affairs of Banks of India. The Insurance Regulatory and

Development Authority Act, 1999 has also given wide powers to IRDA in

order to regulate and control the insurance business in India.

Banking supervision must keep pace with technical innovationsin the banking industry. The international Basel Committee onBanking Super-vision currently is reviewing public comments on itsproposed new method for judging whether a bank maintainsenough capital to absorb unexpected losses. This

Economic CommentaryExplains how existing standards became obsolete and describes thenew plan.


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Supervisory Process

The major instrument of supervision of the financial sector isinspection. The inspection process focuses mainly on aspects crucial to thebanks financial soundness with a recent shift in focus towards riskmanagement. Areas relating to internal control, credit management,overseas branch operations, profitability, and compliance with prudentialregulations, developmental aspects, proper valuation of asset / liabilityportfolio investment portfolio, and the banks role in social lending arecovered in the course of the inspection. The Department undertakesstatutory inspections of banks on the basis of an annual programmed, which

is co-terminus with the financial year for public sector banks. After theinspection report is released to the bank, followed by a supervisory letterbased on the inspection findings to the bank, the concerns of the inspectionsare discussed with the CEO of the bank and a Monitor able Action Plan isgiven to the bank for rectification of those deficiencies. The Departmentsubmits a memorandum covering supervisory concerns brought out by theinspection to the Board for Financial Supervision (BFS). Specific correctivedirections of the BFS are conveyed to the banks concerned for immediatecompliance.

The Memoranda submitted by the departments for supervisory scrutinyand consideration of BFS generally cover matters relating to supervisorystrategy and operational supervision of individual banks, financial institutionsand non-banking financial companies as also industry-wide issues andsectored performance reviews.

Closer supervision on the asset quality and fixing responsibility on theboard and accountability on top management of banks has had a perceptibleimpact on the Non Performing Assets (NPAs) of public sector banks. Thebanks have shown a declining trend in terms of percentage of NPAs to total

advances during the last four years. The percentage of gross NPAs to grossadvances of public sector banks declined from a high level of 19.45 at theend of March 1995 to 13.86 as on 31 March 2000. The net NPAs formed8.07% of the net advances.


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On-site inspection

(i) Banks

In terms of the new approach adopted for the on-site inspection of

banks, the Inspecting Officers concentrate on core assessments based on

the CAMELS model (Capital adequacy, Asset quality,

Management, Earnings appraisal, Liquidity and Systems controls. This

approach eschews aspects which do not have a direct bearing on the

evaluation of the bank as a whole or which should essentially concern the

internal management of the bank. The new approach to Annual

Financial Inspections was put in practice from the cycle of inspections

commencing in July 1997.

A rating system for domestic and foreign banks based on the

international CAMELS model combining financial management and systems

and control elements was introduced for the inspection cycle commencing

from July 1998. The review of the supervisory rating system has been

completed so as to make it more consistent as a measure of evaluation of

banks standing and performance as per on-site review. The improved ratingframework is expected to come into effect from the on-site inspection cycle

commencing from April 2001.

A model to rate the level of customer service in banks was developed and

forwarded to Indian

Banks Association for conducting appropriate surveys on customer

satisfaction at periodical intervals. During the course of annual financial

inspections customer audit is carried out to evaluate quality of customerservice at branches of commercial banks

A Quarterly Monitoring System through on-site visits to the newly

licensed banks in their first5 year of operation has been put in place. Old and

new private banks displaying systemic weaknesses are also subjected to

quarterly monitoring.


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In deference to the desire of the banks (as put forth during an informal

feedback session with the

Governor in October 1999) to have an opportunity to meet the

supervisor at regular intervals for discussing compliance related issues and

agreeing on regulatory and supervisory requirements in respect of new

business initiatives, a quarterly informal meeting system for banks with theofficials of Department of Banking Supervision has been designed and put in

operation from January 2000.

Some of the public sector banks have also been placed under special

monitoring, with a senior

Officer in the jurisdictional Regional Office of the Bank entrusted with the

special monitoring efforts. The Deputy Governor / Executive Director in-

charge of banking supervision call the

CEOs of those banks, wherein serious deficiencies have been reported

in the inspection reports, for a discussion on the specific steps the banks top

management would need to take to improve its financial strength and

operational soundness.

A new Inspection Manual has been brought out in 1998 taking into

account evolving supervisory needs and shift in approach towards risk based

supervision. Another new manual for the use of inspectors looking at ALM

and Treasury operations was prepared with the help of international

consultants under the Technical Assistance Project funded by Department

for International Development (DFID), UK and has been put to use by the

RBI inspectors.

Specialized training modules along with extensive guidelines for use of RBI

Inspectors are in place for inspection of computerized bank systems. An

international consultancy firm, funded by the DFID (UK), helped the Bank in

its aforesaid project.In order to address the issue of causes of divergence observed with regard

to asset classification etc., provisioning required to be made between the

banks/auditors and RBI Inspectors, a representative group of banks, a

chartered accountant and RBI officials was constituted in March 2000 to

review and arrive at uniform parameters of assessment of NPAs by


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banks/auditors and RBI Inspectors. Guidelines are being issued to the banks

and the Inspecting Officers based on the recommendations of the Group.

(ii) Supervision of overseas branches of Indian banks

While inspection of the overseas operations of branches of Indianbanks is left largely to the parent banks, a system of evaluation visits

covering all branches functioning at different financial centers has been

instituted as a part of the initiatives taken to strengthen cross border

supervision.

Besides periodical visits and meetings with overseas supervisors, formal

MOUs for exchange of supervisory information are being worked out as part

of the process of implementation of Basel

Committees core principles on cross border supervisory cooperation.

Portfolio appraisals of the International Divisions of Indian banks having

foreign branches are also conducted by the Department of Banking

Supervision annually. In these appraisal exercises conducted at the banks

corporate offices and controlling divisions of foreign operations, asset quality,

operating results, etc. of the foreign branches and the host country

regulators perceptions are also assessed and periodically discussed with

the banks International Divisions for rectification of the functional gap


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Off-site Monitoring & Surveillance System

(i) BanksAs a part of the new supervisory strategy, an off-site monitoring system

for surveillance over banks was put in place in RBI in March 1996. The first

tranche of OSMOS returns require quarterly reporting on assets, liabilities

and off balance-sheet exposures, CRAR, operating results for the quarter,

asset quality and large credit exposures in respect of domestic operations by

all banks in India. Data on connected and related lending and profile of

ownership, control and management are also obtained in respect of Indian

banks.

Bank profiles containing bank-wide database on all important aspects

of bank functioning including global operations were obtained for the years

commencing from 1994 and are being updated annually on an on-going

basis. The database provides information on managerial and staff

productivity areas besides furnishing important ratios on certain financial

growth and supervisory aspects of the banks functioning.

Analysis of financial and managerial aspects under the reportingsystem is done on quarterly basis in a computerized environment in respect

of banks and reviews are placed before BFS for its perusal and further

directions. The second tranche of returns covering liquidity and interest rate

risk exposures were introduced in June 1999. To accommodate the

increased data and analysis required by the second tranche of returns, a

project to upgrade the OSMOS database has been completed and the new

processing system has been put in place for the Returns commencing from

the quarter ended September 2000.

Trend analysis reports based on certain important macro level

growth/performance indicators are placed before BFS at periodical intervals.

Some of the important reports generated by the

Department include half-yearly review of the performance of banks,

half-yearly key banking statistics, analysis of impaired credits, analysis of


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large credits, analysis of call money borrowings, analysis of non SLR

investments, etc.

The Bank also provides details of peer group performance under various

parameters of growth and operations for the banks of a comparative

business size to motivate them to do self assessment and strive for

excellence.The Indian banks conducting overseas operations report the assets

and liabilities, problem credits, maturity mismatches, large exposures,

currency position on quarterly basis and country exposure, operating results

etc. on an annual basis. The reporting system has been reviewed and

rationalized in 1999 in consultation with the banks and the revised system

put in place in June 2000. The revised off-site returns focus on information

relating to quality and performance of overseas investment and credit

portfolio, implementation of risk management processes, earning trends, andviability of the branches.


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Core Principles for Effective Banking Supervision

The Bank has continued with the post-liberalization strategy of setting

prudential norms based on international best practices within which banks

are left free to operate. The compliance of the

Bank with the Basel Committees Core Principles on Banking Supervision

was gone into in great detail and the gaps in supervision were addressed by

setting up seven in-house groups to make16 necessary recommendations.

The reports of these groups were discussed by the BFS in a specially

convened session and the agenda set for action to be taken to bridge the

gaps. Since then, the compliance is being monitored on a regular basis. TheBFS also authorized the release in the public domain of the assessment of

compliance, and this document is being shared with overseas supervisory

agencies and international financial institutions. The IMF also completed an

assessment using the revised methodology of the Core Principles which was

in line with the Bank's own assessment.

RBIs efforts in this area have been well recognized in international

forums and in August 1999, it was made a Member of the Core Principles

Liaison Group (CPLG) of the Basel Committee for

Banking Supervision, this has been set up to promote the

implementation of the Core Principles world-wide. RBI has also examined

the proposed New Capital Adequacy Framework currently under discussion

by the BCBS, and has communicated its response to the Basel Committee.

RBI is also represented on the Working Group of Capital of the Core

Principles


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Future Agenda

Consultative Process: One of the major changes brought about in the

supervisory functioning is to introduce a consultative process with bankspreceding the introduction of major measures. The guidelines on Asset-

Liability Management (ALM) and on comprehensive Risk Management

Systems have been finalized in 1999 on the basis of feedback received from

banks and the banks advised to implement the guidelines. The supervisory

focus in the coming years will be to monitor the progress of implementation

of these systems and to ensure their full coverage.

Consultative process has also been followed while introducing the guidelinesfor investment in non-SLR securities and review of reporting system covering

overseas branches of Indian banks.

Risk-Based Supervision: A risk based supervisory regime as a means

of more efficient allocation of supervisory resources is also being considered.

The risk based supervision project, which is being guided by international

consultants with the assistance of Department for

International Development (UK) would lead to prioritization of selection anddetermining of frequency and length of supervisory cycle, targeted

appraisals, and allocation of supervisory resources in accordance with the

risk perception of the supervised institutions. The Risk Based

Approach will also facilitate the implementation of the supervisory

review pillar of the proposed

New Capital Accord, which requires that national supervisors set capital

ratios for banks based on their risk profile.

Prompt Corrective Action: To guard against regulatory forbearance and to

ensure that regulatory intervention is consistent across institutions and is in

keeping with the extent of the problem, a framework for Prompt Corrective

Action has been developed. The PCA framework, which will link regulatory

action to quantitative measures of performance, compliance and solvency


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such as CRAR, NPA levels and profitability, has been circulated for

discussion and suggestions to a wider audience of banks and interested

public, and would now be considered by the BFS before being implemented

Consolidated Supervision: An approach of consolidated supervision

that, while leaving the responsibility of supervision of bank subsidiaries to

their respective regulators, will allow bank supervisors to obtain aconsolidated view of the operations of bank groups has been approved.

This will also require greater coordination between the different supervisors

in the financial sector. Quarterly reporting by parent banks on key areas of

functioning of subsidiaries has been introduced from the quarter ending

September 2000. The banks are now being required to annex the financial

statements of their subsidiaries along with their annual accounts. A Working

Group has been set up to look into the introduction of consolidated

accounting and it would submit its report by May 2001. Thus, thecomponents of this diversified approach are being gradually put in place.

Upgrading Reporting Systems: With the increasing reliance upon off-

site reporting as an instrument of supervision, up gradation of systems has

been a focus area of the BFS and this focus will continue in the future. The

project under way to move the surveillance database to

RDBMS with a data-warehousing component will provide line supervisors the

ability to closely monitor banks and detect vulnerabilities in the system at anincipient stage. Skills Up gradation: The skill-set required by supervisors has

changed radically over the past few years. With the introduction of

technology and new products and the move towards risk based supervision,

the demands on supervision have also increased. Thus, meeting the training

needs of supervisors in this changing environment will be a priority area and

will be monitored continuously.

In the coming years, the RBI will continue to guide the development of

supervisory prescriptions and practices along the lines of international bestpractices based on global standards so as to strengthen both the supervisory

regime as well as the Indian banking system.


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Banks Supervision is done by Regulatory

Authorities

Reserve Bank of India (RBI)

Securities Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority

(IRDA)


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Reserve Bank of India

Headquarters Mumbai, Maharashtra

Established 1 April 1935

Governor Duvvuri Subbarao

Central bank of India

Currency Indian Rupee

ISO4217 Code INR

Reserves US$300.21 billion (2010)

Base borrowing rate 8.25%

Base deposit rate 6.00%

Website rbi.org.in
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Introduction

The Reserve Bank of India (RBI) (Hindi:) isthe banking institution of India and controls the monetary policy of

the rupee as well asUS$300.21 billion (2010)[1]of currency reserves. The

institution was established on 1 April 1935 during the British Raj in

accordance with the provisions of the Reserve Bank of India Act, 1934. The

share capital was divided into shares of Rs. 100 each fully paid which was

entirely owned by private shareholders in the beginning.[2]Reserve Bank of

India plays an important part in the development strategy of the government.It is a member bank of the Asian Clearing Union. Reserve Bank of India was

nationalized in the year 1949. The general superintendence and direction of

the Bank is entrusted to Central Board of Directors of 20 members, the

Governor and four Deputy Governors, one Government official from the

Ministry of Finance, ten nominated Directors by the Government to give

representation to important elements in the economic life of the country, and

four nominated Directors by the Central Government to represent the four

local Boards with the headquarters at Mumbai, Kolkata, Chennai and New

Delhi. Local Boards consist of five members each Central Government

appointed for a term of four years to represent territorial and economic

interests and the interests of co-operative and indigenous banks

Structure

Central Board of Directors

The Central Board of Directors is the main committee of the central

bank. The Government of India appoints the directors for a four-year term.

The Board consists of a governor, four deputy governors, four directors to

represent the regional boards, and ten other directors from various fields.
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Core Functions

The Department of Banking Supervision at present exercises thesupervisory role relating to commercial banks and select FIs in the followingforms:

a. Undertaking scheduled and special on-site inspections of banks, their off-site surveillance as also post inspection follow-up of compliance.

b. Serving as the secretariat for the Board for Financial Supervision (BFS).

c. Determining the criteria for the appointment of statutory auditors andspecial auditors and assessing audit performance and disclosure standards.

d. Dealing with financial sector frauds and attending to the complaintsreceived against the banks and FIs from public, banks, Government, etc.

e. Exercising supervisory intervention in the implementation of regulationswhich includes - recommendation for removal of managerial and other

persons, suspension of business, amalgamation, merger/winding up,issuance of directives and imposition of penalties.

In 2004, the work relating to inspection of Authorised Dealers has also beentransferred from the Foreign Exchange Department to this Department.


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Main functions

Bank of IssueUnder Section 22 of the Reserve Bank of India Act, the Bank has the

sole right to issue bank notes of all denominations. The distribution of one

rupee notes and coins and small coins all over the country is undertaken by

the Reserve Bank as agent of the Government. The Reserve Bank has a

separate Issue Department which is entrusted with the issue of currency

notes. The assets and liabilities of the Issue Department are kept separate

from those of the Banking Department. Originally, the assets of the Issue

Department were to consist of not less than two-fifths of gold coin, goldbullion or sterling securities provided the amount of gold was not less than

Rs. 40 crores in value. The remaining three-fifths of the assets might be held

in rupee coins, Government of India rupee securities, eligible bills of

exchange and promissory notes payable in India. Due to the exigencies of

the Second World War and the post-was period, these provisions were

considerably modified. Since 1957, the Reserve Bank of India is required to

maintain gold and foreign exchange reserves of Rs. 200 crores, of which at

least Rs. 115 crores should be in gold. The system as it exists today is

known as the minimum reserve system.

Developmental role

The central bank has to perform a wide range of promotional functions

to support national objectives and industries.[6]The RBI faces a lot of inter-

sectoral and local inflation-related problems. Some of this problems are

results of the dominant part of the public sector.[28]
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Monetary authority

The Reserve Bank of India is the main monetary authority of the

country and beside that the central bank acts as the bank of the national and

state governments. It formulates, implements and monitors the monetary

policy as well as it has to ensure an adequate flow of credit to productive

sectors. Objectives are maintaining price stability and ensuring adequate

flow of credit to productive sectors. The national economy depends on the

public sector and the central bank promotes an expansive monetary policy to

push the private sector since the financial market reforms of the 1990s.

The institution is also the regulator and supervisor of the financial system

and prescribes broad parameters of banking operations within which the

country's banking and financial system functions. Objectives are to maintain

public confidence in the system, protect depositors' interest and provide

cost-effective banking services to the public. The Banking Ombudsman

Schemehas been formulated by the Reserve Bank of India (RBI) for

effective addressing of complaints by bank customers. The RBI controls the

monetary supply, monitors economic indicators like the gross domestic

product and has to decide the design of the rupee banknotes as well as

coins

Manager of exchange control

The central bank manages to reach the goals of the Foreign Exchange

Management Act, 1999. Objective: to facilitate external trade and payment

and promote orderly development and maintenance of foreign exchange

market in India

Minimum Reserve System - Principle of Currency Note IssueRBI can issue currency notes as much as the country requires,

provided it has to make a security deposit of Rs. 200 crores, out of which Rs.

115 crores must be in gold and Rs. 85 crores must be FOREX Reserves.

This principle of currency notes issue is known as the 'Minimum Reserve

System'.
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Issuer of currency

The bank issues and exchanges or destroys currency and coins not fit

for circulation. The objectives are giving the public adequate supply ofcurrency of good quality and to provide loans to commercial banks to

maintain or improve the GDP. The basic objectives of RBI are to issue bank

notes, to maintain the currency and credit system of the country to utilize it in

its best advantage, and to maintain the reserves. RBI maintains the

economic structure of the country so that it can achieve the objective of price

stability as well as economic development, because both objectives are

diverse in themselves.

Related functions

The RBI is also a banker to the government and performs merchant

banking function for the central and the state governments. It also acts as

their banker. The National Housing Bank (NHB) was established in 1988 to

promote private real estate acquisition.[29]The institution maintains banking

accounts of all scheduled banks, too.

There is now an international consensus about the need to focus the tasks of

a central bank upon central banking. RBI is far out of touch with such a

principle, owing to the sprawling mandate described above.
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Policy rates and Reserve ratios

Policy rates, Reserve ratios, lending, and deposit rates as of 14

September, 2011

Bank Rate 6.0%

Repo Rate 8.25%

Reverse Repo Rate 7.25%

Cash Reserve Ratio (CRR) 6.0%

Statutory Liquidity Ratio (SLR) 24.0%

Base Rate 9.50%10.75%

Reserve Bank Rate 4%

Deposit Rate 8.50%9.50%

Bank Rate:

RBI lends to the commercial banks through its discount window tohelp the banks meet depositors demands and reserve requirements. The

interest rate the RBI charges the banks for this purpose is called bank rate. If

the RBI wants to increase the liquidity and money supply in the market, it will

decrease the bank rate and if it wants to reduce the liquidity and money

supply in the system, it will increase the bank rate. As of 5 May, 2011 the

bank rate was 6%.


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Cash Reserve Ratio (CRR):

Every commercial bank has to keep certain minimum cash reserves

with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to

increase or decrease the reserve requirement depending on whether it wants

to affect a decrease or an increase in the money supply. An increase in Cash

Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold

a large proportion of their deposits in the form of deposits with the RBI. This

will reduce the size of their deposits and they will lend less. This will in turn

decrease the money supply. The current rate is 6%.

Statutory Liquidity Ratio (SLR):

Apart from the CRR, banks are required to maintain liquid assets in the

form of gold, cash and approved securities. Higher liquidity ratio forces

commercial banks to maintain a larger proportion of their resources in liquid

form and thus reduces their capacity to grant loans and advances, thus it is

an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from

loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market

operations--buying and selling of eligible securities by central bank in the

money market--to influence the volume of cash reserves with commercial

banks and thus influence the volume of loans and advances they can make

to the commercial and industrial sectors. In the open money market,

government securities are traded at market related rates of interest. The RBI

is resorting more to open market operations in the more recent years.
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Generally RBI uses three kinds of selective credit controls:

1. Minimum margins for lending against specific securities.

2. Ceiling on the amounts of credit for certain purposes.

3. Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

1. Part of the interest rate structure i.e. on small savings and provident

funds, are administratively set.

2. Banks are mandatorily required to keep 24% of their deposits in the

form of government securities.

3. Banks are required to lend to the priority sectors to the extent of 40%

of their advances.


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Core Principles of Effective Banking Supervision

Reserve Bank of India

Section I. Preconditions for Effective Banking Supervision

Section II. Licensing and Structure

Section III. Prudential Regulations and Requirements

Section IV. Methods of Ongoing Banking Supervision

Section V. Information Requirements

Section VI. Formal Powers of Supervisors

Section VII. Cross-border Banking


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Bankers to Bank

Banks are required to maintain a portion of their demand and timeliabilities as cash reserves with the Reserve Bank, thus necessitating a need

for maintaining accounts with the Bank. Further, banks are in the business ofaccepting deposits and giving loans. Since different persons deal withdifferent banks, in order to settle transactions between various customersmaintaining accounts with different banks, these banks have to settletransactions among each other. Settlement of inter-bank obligations thusassumes importance.

To facilitate smooth operation of this function of banks, an arrangementhas to be made to transfer money from one bank to another. This is usuallydone through the mechanism of a clearing house where banks presentcheques and other such instruments for clearing. Many banks also engage in

other financial activities, such as, buying and selling securities and foreigncurrencies. Here too, they need to exchange funds between themselves. Inorder to facilitate a smooth inter-bank transfer of funds, or to make paymentsand to receive funds on their behalf, banks need a common banker.In order to meet the above objectives, in India, the Reserve Bank providesbanks with the facility of opening accounts with itself. This is the Banker toBanks function of the Reserve Bank, which is delivered through the DepositAccounts Department (DAD) at the Regional offices. The Department ofGovernment and Bank Accounts oversees this function and formulates policy

and issues operational instructions to DAD.To fulfill this function, the Reserve Bank opens current accounts ofbanks with itself, enabling these banks to maintain cash reserves as well asto carry out inter-bank transactions through these accounts. Inter-bankaccounts can also be settled by transfer of money through electronic fundtransfer system, such as, the Real Time Gross Settlement System (RTGS).The Reserve Bank continuously monitors operations of these accounts toensure that defaults do not take place. Among other provisions, the ReserveBank stipulates minimum balances to be maintained by banks in theseaccounts. Since banks need to settle funds with each other at various places

in India, they are allowed to open accounts with different regional offices ofthe Reserve Bank. The Reserve Bank also facilitates remittance of fundsfrom a banks surplus account at one location to its deficit account atanother.


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Such transfers are electronically routed through a computerizedsystem.The computerization of accounts at the Reserve Bank has greatly facilitated

banks monitoring of their funds position in various accounts across different locations on a real-time basis.Enabling smooth, swift and seamless clearing and settlement of inter-bankobligations. Providing an efficient means of funds transfer for banks.

Enabling banks to maintain their accounts with the Reserve Bank forstatutory reserve requirements and maintenance of transaction balances.

As Banker to Banks, the Reserve Bank focuses on:

In addition, the Reserve Bank has also introduced the CentralizedFunds Management System (CFMS) to facilitate centralised funds enquiryand transfer of funds across DADs. This helps banks in their fundmanagement as they can access information on their balances maintainedacross different DADs from a single location. Currently, 75 banks are using

the system and all DADs are connected to the system.

As Banker to Banks, the Reserve Bank provides short-term loans andadvances to select banks, when necessary, to facilitate lending to specificsectors and for specific purposes. These loans are provided againstpromissory notes and other collateral given by the banks.

As a Banker to Banks, the Reserve Bank also acts as the lender of lastresort. It can come to the rescue of a bank that is solvent but facestemporary liquidity problems by supplying it with much needed liquidity whenno one else is willing to extend credit to that bank. The Reserve Bank

extends this facility to protect the interest of the depositors of the bank and toprevent possible failure of a bank, which in turn may also affect other banksand institutions and can have an adverse impact on financial stability andthus on the economy.


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Commercial Banks

LicensingFor commencing banking operations in India, whether by an Indian or a

foreign bank, a license from the Reserve Bank is required. The opening ofnew branches by banks and change in the location of existing branches arealso regulated as per the Branch Authorization Policy. This policy hasrecently been liberalized significantly and Indian banks no longer requirelicense from the Reserve Bank for opening a branch at a place withpopulation of below50,000. The Reserve Bank continues to emphasise opening of branches bybanks in unbanked and under-banked areas of the country. The Reserve

Bank also regulates merger, amalgamation and winding up of banks.

Corporate GovernanceThe Reserve Banks policy objective is to ensure high-quality corporate

governance in banks. It has issued guidelines stipulating fit and propercriteria for directors of banks. In terms of the guidelines, a majority of thedirectors of banks are required to have special knowledge or practicalexperience in various relevant areas. The Reserve Bank also has powers toappoint additional directors on the board of a banking company.

Statutory Pre-emotionsCommercial banks are required to maintain a certain portion of their

NetDemand and Time Liabilities (NDTL) in the form of cash with the ReserveBank, called Cash Reserve Ratio (CRR) and in the form of investment inunencumbered approved securities, called Statutory Liquidity Ratio (SLR).The Reserve Bank also monitors compliance with these requirements bybanks in their day-to-day operations.

Interest RateThe interest rates on most of the categories of deposits and lending

transactions have been deregulated and are largely determined by banks.However, the Reserve Bank regulates the interest rates on savings bankaccounts and deposits of non-resident Indians (NRI), small loans up torupees two lakh, export credits and a few other categories of advances.


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Risk ManagementBanks, in their daily business, face various kinds of risks. The Reserve

Bank requires banks to have effective risk management systems to covercredit risk, market risk, operational risk and other risks. It has issuedguidelines, based on the Basel II capital adequacy framework, on how tomeasure these risks as well as how to manage them

Protection of Small DepositorsThe Reserve Bank has set up Deposit Insurance and Credit Guarantee

Corporation (DICGC) to protect the interest of small depositors, in case ofbank failure. The DICGC provides insurance cover to all eligible bankdepositors up to Rs.1 lakh per depositor per bank.

Para - banking ActivitiesThe banking sector reforms and the gradual deregulation of the sector

inspired many banks to undertake non-traditional banking activities, alsoknown as para-banking. The Reserve Bank has permitted banks toundertake diversified activities, such as, asset management, mutual fundsbusiness, insurance business, merchant banking activities, factoringservices, venture capital, card business, equity participation in venture fundsand leasing.

Periodic MeetingsThe Reserve Bank periodically meets the top management of banks to

discuss the findings of its inspections. In addition, it also has quarterly /monthly discussions with them on important aspects based on OSMOSreturns and other inputs.

Monitoring of FraudsThe Reserve Bank regularly sensitizes banks about common fraud-

prone areas, the modus operandi and the measures necessary to preventfrauds. It also cautions banks about unscrupulous borrowers who haveperpetrated frauds with other banks.


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Foreign Banks

In February 2005, the Government of India and the Reserve Bankreleased the Roadmap for presence of Foreign Banks in India laying out a

two-track and gradualist approach aimed at increasing the efficiency andstability of the banking sector in India. One track was the consolidation of thedomestic banking system, both in private and public sectors, and the secondtrack was the gradual enhancement of the presence of foreign banks in asynchronized manner. The roadmap was divided into two phases, the firstphase spanning the period March 2005 - March 2009, and the second phasebeginning April 2009 after a review of the experience gained in the firstphase.

In view of the recent global financial market turmoil, there are

uncertainties surrounding the financial strength of banks around the world.Further, the regulatory and supervisory policies at national and internationallevels are under review. In view of this, the current policy and proceduresgoverning the presence of foreign banks in India will continue. The proposedreview will be taken up after consultation with the stakeholders once there isgreater clarity regarding stability, recovery of the global financial system anda shared understanding on the regulatory and supervisory architecturearound the world.

Supervisory Strategy

The Department of Banking Supervision has formulated and put in place a

supervisory strategy which, besides retaining the importance of on-siteinspections which has been the main plank of banking supervision, alsofocuses on three other areas:

off-site monitoring through introduction of a set of Returns; Strengthening of the internal control systems in banks and Increased use of external auditors in banking supervision.


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Securities Exchange Board of India

Establishment of SEBI

The Securities and Exchange Board of India was established on April12, 1992 in accordance with the provisions of the Securities and ExchangeBoard of India Act, 1992.

Preamble

The Preamble of the Securities and Exchange Board of India describes thebasic functions of the Securities and Exchange Board of India as

..to protect the interests of investors in securities and topromote the development of, and to regulate the securities marketand for matters connected therewith or incidental thereto
http://www.sebi.gov.in/acts/act15ac.htmlhttp://www.sebi.gov.in/acts/act15ac.htmlhttp://www.sebi.gov.in/acts/act15ac.htmlhttp://www.sebi.gov.in/acts/act15ac.html


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Objectives of SEBI

(a) protecting the interests of investors in securities(b) promoting the development of the securities market and

(c) Regulating the securities market.

Introduction

On April 12, 1988, the Securities and Exchange Board of India (SEBI)was established with a dual objective of protecting the rights of small

investors and regulating and developing the stock markets in India.

SEBI introduced on-line trading and demat of shares which did awaywith the age-old paper-based trading, thus bringing more transparency intothe trading system.

Analysts and experts appreciated SEBI for thesereforms. One stock market analyst said, "I'm sure that most of us wouldagree that SEBI has handled the challenges exceptionally well." In spite ofSEBI's capital market reforms and increasing regulatory powers over theyears, analysts felt that it had failed miserably in stopping stock marketscams. In the ten years after the Mehta scam, several scams came to light,casting doubt on the efficiency of SEBI as a regulatory body.

In 1992 the Bomba Stock Exchan e BSE the leadin stock exchan e inIndia, witnessed the first major scam masterminded by HarshadMehta. Analysts unanimously felt that if more powers had been given toSEBI the scam would not have happened.

As a result, the Government of India (GoI) brought in a separate legislation

by the name of 'SEBI Act 1992' and conferred statutory powers to it. Sincethen, SEBI had introduced several stock market reforms. These reforms

Significantly transformed the face of Indian stock markets.


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Activities of SEBI

Rules regarding registration of intermediaries

Guidelines and Code of Conduct for Merchant Bankers

Categorisation of Merchant Bankers

Guidelines for Portfolio Management Services

Ciruclars on various issues (Periodical)

Guidelines for Lead-managers

Regulation for Registrars and Share-Transfer agents

Guidelines for IPOs, Debt. Instruments

Regulation on Insider trading

Guidelines for Mutual funds

Regulation on take overs

Code for Corporate Governance

Consultative Paper on free market pricing of Capital Issues.

Advisory committees for Primary and Secondary Market Reviews

Investor Protection guidelines

Guidelines on SROs for Merchant Bankers

Regulation of Futures and Options, Index Market Informal Guidance


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Major SEBI Guidelinesfor banks

In order to attain the objectives, SEBI has issued Guidelines, Rules andRegulations from time to time. The most important of these is the SEBI (Disclosure and Investor Protection) Guidelines, 2010". The provisions of

these Guidelines,2000 are aimed to protect the interest of the investors insecurities.

The Guidelines, 2010 deals with the following areas :

Eligibility norms for companies issuing securities,

Pricing of securities by companies,

Promoters contribution and lock-in requirements,

Pre-issue obligations of the merchant bankers,

Contents of the prospectus/abridged prospectus letter of offer, Post issue obligation, of merchant bankers,

Green shoe option,

Guidelines on advertisements,

Guidelines for issue of debt instruments,

Guidelines for book building process

Guidelines on public offer through stock exchange on-Iine system,

Guidelines for issue of capital by financial institutions,

Guidelines for preferential issues of securities,

Guidelines for bonus issues,

Other operational and miscellaneous matters.

In order to regulate and control and to provide a code of conduct for the

merchant bankers, other participants of capital market, and other mattersrelating to trading of securities, SEBI has issued several Rules andRegulations. These are related to Bankers to the issues, Buy back ofsecurities, Collective Investments Schemes, Delisting of securities,Depositors, Derivatives, Employee stock options, Foreign Institutional

Investors(FIIs), Insider Trading, Lead Manager, Market Makers, MerchantBankers, Mutual Funds, Ombudsman, Portfolio Manager, Registrars andShare Transfer Agents, Securities Lending Scheme, Sweat Equity, StockBrokers and sub-brokers, Takeover Regulations, Transfer of Shares,


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Guidelines for Mutual Funds in Banks

The Securities and Exchange Board of India (SEBI) has broughtin sweeping changes for the mutual fund industry. The impact of which willbe felt on the investor in more ways than one.

1) First, for New Fund Offers (NFOs): They will only beopen for 15 days. (ELSS funds though will continue tostay open for up to 90 days) It will save investors froma prolonged NFO period and being harangued byadvisors and advertisements. The motivation behindthe rule seems to be simple if you can investanytime, why keep NFO period long?

2) NFOs can only be invested at the close of the NFO period. Earlier,Mutual funds would keep an NFO open for 30 days, and the minute theyreceived their first cheque, the money would be directly invested in themarket; creating a skewed accounting for those that entered later sincethey get a fixed NFO price.

The market regulator has corrected this by extending ApplicationSupported by Blocked Amount (ASBA) to mutual funds. This will becomeeffective starting July 1 st this year.

By the ASBA process (Application Supported by Blocked Amount) one cancontinue to earn interest in the bank account until the NFO closes(remember there is usually no rejection or oversubscription in a mutualfund NFO) which means that the cheque goes for clearing after the NFOhas closed irrespective of when it was sent. The fund manager will be ableto invest once the NFO closes.

3) Dividends can now only be paid out of actually realized gains. Impact: it will

reduce both the quantum of dividends announced, and the measures usedby MFs to garner investor money using dividend as a carrot to entice newinvestors.

4) Equity Mutual funds have been asked to play a more active role incorporate governance of the companies they invest in. This will help mutualfunds become more active and not just that, they must reveal, in theirannual reports from next year, what they did in each vote. SEBI has now


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made it mandatory for funds to disclose whether they voted for or againstmoves (suggested by companies in which they have invested) such asmergers, demergers, corporate governance issues, appointment and

removal of directors. MFs have to disclose it on their website as well asannual reports.

5) Equity Funds were allowed to charge 1% more as management feesif the funds were no-load; but since SEBI has banned entry loads, thisextra 1 % has also been removed.

6) SEBI has also asked Mutual Funds to reveal all commission paid to itssponsor or associate companies, employees and their relatives.

7) Regarding the Fund-of-Fund (FOF) The market regulator has statedthat information documents that Asset Management Companies (AMCs)have been entering into revenue sharing arrangements with offshorefunds in respect of investments made on behalf of Fund of Fund schemescreate conflict of interest. Henceforth, AMCs shall not enter into anyrevenue sharing arrangement with the underlying funds in any manner andshall not receive any revenue by whatever means/head from theunderlying fund.

These guidelines set by the SEBI will lead to greater transparency for thecommon investor. SEBI formulates policies and regulates the mutualfunds to protect the interest of the investors. With these guidelines fallingin place it would create better trust and transparency and an investableenvironment that would attract investors with greater faith and confidence. Awelcome &refreshing move!


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SEBI Guidelines for Merchant Banks

1. IPOs of small companiesPublic issue of less than five crores has to be through OTCEI and

separate guidelines apply for floating andlisting of these issues.

2. Size of the Public IssueIssue of shares to general public cannot be less than 25% of the total

issue, incase of information technology,media and telecommunication sectors this stipulation is reduced subject to

the conditions that:

Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution

Promoters should bring in their contribution including premium fullybefore the issue

Minimum Promoters contribution is 20-25% of the public issue. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications

There should be at least 30 mandatory collection centers, whichshould include invariably the places where stock exchanges havebeen established.

For issues not exceeding Rs.10 crores (including premium, if any),

the collection centres shall be situated at the four metropolitancentres viz. Bombay, Delhi, Calcutta, Madras; and at all such centreswhere stock exchanges are located in the region in which theregistered office of the company is situated.


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5. Regarding allotment of shares

Net Offer to the General Public has to be at least 25% of the TotalIssue Size for listing on a Stock exchange.

It is mandatory for a company to get its shares listed at the regionalstock exchange where the registered office of the issuer is located.

In an Issue of more than Rs. 25 crores the issuer is allowed to placethe whole issue by book-building

Minimum of 50% of the Net offer to the Public has to be reserved forInvestors applying for less than 1000 shares.

There should be atleast 5 investors for every 1 lakh of equity offered(not applicable to infrastructure companies).

Quoting of Permanent Account Number or GIR No. in application forallotment of securities is compulsory where monetary value of

Investment is Rs.50,000/- or above. Indian development financial institutions and Mutual Fund can be

allotted securities upto 75% of the Issue Amount. A Venture Capital Fund shall not be entitled to get its securities listed

on any stock exchange till the expiry of 3 years from the date ofissuance of securities.

Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of24%, which can be further extended to 30% by an application to theRBI - supported by a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities

The minimum period for which a public issue has to be kept open is 3working days and the maximum for which it can be kept open is 10working days. The minimum period for a rights issue is 15 workingdays and the maximum is 60 working days.

A public issue is affected if the issue is able to procure 90% of theTotal issue size within 60 days from the date of earliest closure of thePublic Issue. In case of over-subscription the company may have the

right to retain the excess application money and allot shares morethan the proposed issue, which is referred to as the green-shoeoption.

A rights issue has to procure 90% subscription in 60 days of theopening of the issue.

Allotment has to be made within 30 days of the closure of the PublicIssue and 42 days in case of a Rights issue.


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7. Dispatch of Refund Orders

Refund orders have to be dispatched within 30 days of the closure ofthe Public Issue.

Refunds of excess application money i.e. for un-allotted shares haveto be made within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO

Underwriting is not mandatory but 90% subscription is mandatory foreach issue of capital to public unless it is disinvestment in which caseit is not applicable.

If the issue is undersubscribed then the collected amount should bereturned back (not valid for disinvestment issues).

If the issue size is more than Rs. 500 crores voluntary disclosuresshould be made regarding the deployment of the funds and anadequate monitoring mechanism to be put in place to ensurecompliance.

There should not be any outstanding warrants or financialinstruments of any other nature, at the time of initial public offer.

In the event of the initial public offer being at a premium, and if therights under warrants or other instruments have been exercisedwithin the twelve months prior to such offer, the resultant shares willnot be taken into account for reckoning the minimum promoter'scontribution and further, the same will also be subject to lock-in.

Code of advertisement specified by SEBI should be adhered to. Draft prospectus submitted to SEBI should also be submitted

simultaneously to all stock exchanges where it is proposed to belisted.

9. Restrictions on other allotments

Firm allotments to mutual funds, FIIs and employees not subject to

any lock-in period. Within twelve months of the public/rights issue no bonus issue should

be made. Maximum percentage of shares, which can be distributed to

employees, cannot be more than 5% and maximum shares to beallotted to each employee cannot be more than 200.


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Insurance Regulatory and DevelopmentAuthority

Establishment of IRDA:

Life Insurance in India was nationalized by incorporating LifeInsurance Corporation (LIC) in 1956.All private life insurance companies at

that time were taken over by LIC.In 1993 the Government of Republic of Indiaappointed RN Malhotra Committee to lay down abroad map for privatizationof the life insurance sector.While the committee submitted its report in 1994, it took another six years before theenabling legislation was passed in the year 2000, legislation amending theInsurance Act of 1938 and legislating the Insurance Regulatory andDevelopment Authority Act of 2000.The same year that the newlyappointed insurance regulator - Insurance Regulatory andDevelopment Authority IRDA-- started issuing licenses to private lifeinsurers. The Insurance sector in India has gone through a number of phases andchanges, particularly in the recent years when the Govt. of India in 1999 opened up theinsurance sector by allowing private companies to solicit insurance and alsoallowing FDI up to 26%.Life and general insurance in India is still a nascentsector with huge potential for various global players with the life insurancepremiums accounting to 2.5% of the country's GDP while generalinsurance premiums to 0.65% of India's GDP


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Introduction

The Insurance Regulatory and Development Authority (IRDA) is a

national agency of the Government of India, based in Hyderabad. It was

formed by an act of Indian Parliament known as IRDA Act 1999, which was

amended in 2002 to incorporate some emerging requirements. The

Insurance Regulatory and Development Authority IRDA were constituted as

an autonomous body to regulate and develop the business of insurance

and re-insurance in India. The Authority was constituted on April 19, 2000.

The Insurance Regulatory and Development Authority Act, 1999, wereenacted by Parliament. IRDA was set up in 1996 but it was formally

constituted as a regulator of the insurance industry in April 2000 Mission of

IRDA as stated in the act is "to protect the interests of the policyholders, to

regulate, promote and ensure orderly growth of the insurance industry and

for matters connected therewith or incidental thereto." ..The objectives of

IRDA are policyholder protection and healthy growth of the insurance

market. IRDA has constituted the Insurance Advisory Committee and in

consultation with the committee has brought out seventeen regulations. Aleading consumer activist has also been inducted into the Insurance

Advisory Committee. In addition, representatives of consumers, industry,

insurance agents, womens organizations, and other interest groups are a

part of this committee.

In 2010, the Government of India ruled that the Unit Linked Insurance

Plans (ULIPs) will be governed by IRDA, and not the market regulator

Securities and Exchange Board of India.
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Hyderabad_(India)http://en.wikipedia.org/wiki/Unit_Linked_Insurance_Planhttp://en.wikipedia.org/wiki/Unit_Linked_Insurance_Planhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_Indiahttp://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_Indiahttp://en.wikipedia.org/wiki/Unit_Linked_Insurance_Planhttp://en.wikipedia.org/wiki/Unit_Linked_Insurance_Planhttp://en.wikipedia.org/wiki/Hyderabad_(India)http://en.wikipedia.org/wiki/Government_of_India


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Expectations

The law of India has following expectations from IRDA...

1. To protect the interest of and secure fair treatment to policyholders.

2. To bring about speedy and orderly growth of the insurance industry

(including annuity and superannuation payments), for the benefit of

the common man, and to provide long term funds for accelerating

growth of the economy.

3. To set, promote, monitor and enforce high standards of integrity,

financial soundness, fair dealing and competence of those it

regulates.

4. To ensure that insurance customers receive precise, clear and

correct information about products and services and make them

aware of their responsibilities and duties in this regard.

5. To ensure speedy settlement of genuine claims, to prevent insurance

frauds and other malpractices and put in place effective grievance

redressal machinery.

6. To promote fairness, transparency and orderly conduct in financialmarkets dealing with insurance and build a reliable management

information system to enforce high standards of financial soundness

amongst market players.

7. To take action where such standards are inadequate or ineffectively

enforced.

8. To bring about optimum amount of self-regulation in day to day

working of the industry consistent with the requirements of prudential

regulation.


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Insurance Regulatory and Development Authority Act

The passage of Insurance Regulatory and Development Authority Actin 1999 can be seen a dividing line for insurance business in India. It wasan outcome of the implementation of the recommendations of a highpowered committee, which suggested the setting up of a statutory bodycalled the Insurance Regulatory Authority in 1996. This body was laterrenamed as Insurance regulatory and Development Authority with thepassage of IRDA Act by the parliament.

Insurance ActThe passage of the Insurance Act, 1938 and its subsequent amendmentsin 1950 and 1999 are serious attempts to bring order in the businessofinsurance in India. The Act attempted to address various issues relatingto the business. Some of them are:

Protection of policy holder interest Limiting the expenses of insurance organizations Establishment of tariff advisory committee Solvency levels to be maintained Creation of Insurance organization Defining the roles and responsibilities of various functionaries

associated with the business

Objectives of IRDA Act

To protect the investor's interest To promote orderly growth of insurance industry in the country,

including registration of insurance companies To administer the provisions of Insurance Acts To devise control activities needed for smooth functioning of

the insurance companies including investment of funds andsolvency requirements to be maintained by insurance companies.

To lay down the accounting methodology to be adopted To adjudicate on disputes


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Functions of IRDA

As defined by theIRDA Act, 1999

, the broad functions of IRDA are asfollows:

Ensure orderly growth of the Insurance industry Protection of policyholder's interest Issue consumer protection guidelines

to insurance companies

Grant, modify, and suspend license for insurance companies Lay down procedure for accounting policies to be adopted by

the insurance companies Inspect and audit of insurance companies and other related

agencies Regulation of capital adequacy, solvency, and

prudential requirements of insurance business Regulation of product development and their pricing

including free pricing of products Promote and regulate Self Regulating organizations in

the insurance industry Re-insurance limit monitoring Monitor investments Vetting of accounting standards,

transparency requirements in reporting Ensure the health of the industry by preventing sickness

through appropriate action Publish information about the industry Prescribe qualification and training needs of agents Monitor the charges for various services provided

by insurance companies


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Duties and Powers of IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers andfunctions of IRDA

1. Subject to the provisions of this Act and any other law for the time

being in force, the Authority shall have the duty to regulate, promote

and ensure orderly growth of the insurance business and re-

insurance business

2. Without prejudice to the generality of the provisions contained in sub-

section (1), the powers and functions of the Authority shall include,

Issue to the applicant a certificate of registration, renew,

modify, withdraw, suspend or cancel such registration;

Protection of the interests of the policy holders in mattersconcerning assigning of policy, nomination by policy holders,

insurable interest, settlement of insurance claim, surrender

value of policy and other terms and conditions of contracts of

insurance;

Specifying requisite qualifications, code of conduct and

practical training for intermediary or insurance intermediariesand agents;

Specifying the code of conduct for surveyors and loss

assessors;


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Promoting efficiency in the conduct of insurance business;

Promoting and regulating professional organizations

connected with the insurance and re-insurance business;

Calling for information from, undertaking inspection of,

conducting enquiries and investigations including audit of the

insurers, intermediaries, insurance intermediaries and other

organizations connected with the insurance business;

Control and regulation of the rates, advantages, terms andconditions that may be offered by insurers in respect of

general insurance business not so controlled and regulated

by the Tariff Advisory Committee under section 64U of the

Insurance Act, 1938 (4 of 1938);

Specifying the form and manner in which books of account

shall be maintained and statement of accounts shall be

rendered by insurers and other insurance intermediaries;

Regulating investment of funds by insurance companies;

Regulating maintenance of margin of solvency;

Adjudication of disputes between insurers and intermediaries

or insurance intermediaries;

Specifying the percentage of premium income of the insurer

to finance schemes for promoting and regulating

professional organizations referred to in clause (f);


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IPO guidelines for Banks carrying Insurance: IRDA

Insurance sector regulator IRDA today said it is likely tocome out with initial public offer (IPO) guidelines byOctober.

"We had two meetings with the SEBI and couple of more isrequired (to decide on final guideline on IPO)," IRDAChairman J Hari Narayan said at a CII event."If I takeoptimistic frame probably by October, he said, when asked

by when guidelines would be finalized. There are 22 lifeinsurance firms and 21 non-life insurance companiesoperating in the country currently.

To facilitate fair valuation of an insurance firm, the regulatoris likely to come out with guidelines over the next 15 days.

"Guidance note on valuation has to come from the Instituteof Actuaries and this is likely to come in the next 10-15days."

These will standardize the norms for calculation ofembedded value of the companies, he said, adding, oncethe institute comes out with guidance note then insurancecompanies have to follow.

IRDA is also working on disclosure norms for insurance

companies that will work in the larger interest of the public,he said. Asked whether disclosure norms would come beforeIPO guidelines, he replied saying "that should seem verylogical way of doing it."


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He said, "There are two things, one is disclosure for IPOwhat is called draft red herring prospectus and the other isthe disclosure on the systematic basis by listed companies

for example their balance sheet details, quarterly or semi-annual disclosure."

Expressing concern over rising claims in the healthinsurance segment Hari Narayan said, "One thing verystriking for the insurance system which we see in India isthat the (health) insurance portfolio has got negative claimratio of 110 per cent."

For the individual health products the claims ratio is around

80-90 per cent whereas for the group it is 120 per cent, hesaid.

So obviously, he said, group policy management is not aseffective as individual policy management.

Noting that the growth of group policy is close to 60 per cent,he said when every other line is loosing their business in

terms of growth, the rising number of group insurance is nota healthy trend.

Recognizing the importance of engagement with multiplestakeholders in finding solutions to various challenges, hesaid, there is need to ensure accessibility, affordability andefficiency in the health insurance system of the country.

It requires sustained and focused efforts on the part ofall stockholders in the health insurance eco-system, he said.


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Conclusion

Allowing a bank to fail is the tragedy that a supervisor should try to

avoid. In order to ensure that banks are not allowed to fail, it is essential

that corrective actions must be taken when banks have adequate cushionof capital and their financial position is still satisfactory. This is important

since low or negative capital base and adverse financial conditions will

induce banks to try desperate measures such as, offering very high interest

rates on deposits to fund high risk borrowers. The Basel Committee had

also endorsed the need for supervisors taking timely corrective action when

banks fail to meet CRAR or other prudential requirements. It is accepted

that intervention should be guided by rules rather than left to the discretion

of supervisors.The best known example of rule-based structured early intervention is

the compulsory quantitative triggers for action by FDIC. Similar rules have

been adopted in some developed economies and in a number of emerging

market economies. While CRAR is generally accepted as a trigger point, a

few emerging market economies have adopted multiple trigger points, viz.

illiquidity, insolvency, serious violation of laws and regulations, non-

compliance with prudential standards, etc.

The rule-based framework in most of the countries focuses on the

need to prevent insolvency of banks. It is, however, considered desirable to

build a broader PCA regime in India so as to delineate rule-based actions

not only for shortfall in capital but also for other indicators of deficiency so

that a seamless paradigm for corrective actions can be put in place for

major deficiencies in banks functioning. Accordingly, a schedule of

corrective actions has been worked out based on three parameters. It is

suggested to incorporate a blend of mandatory and discretionary prompt

actions for every trigger point to deal comprehensively with differentdimensions of problems. However, in exceptional cases, RBI will have right

to waive mandatory provisions. While the published balance sheets, off-site

returns and on-site inspection reports are the primary sources for

identifying banks to be placed under PCA framework, the discretion to

enforce PCA will be vested with BFS.


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BIBLIOGRAPHY

BOOKS

AUDIT P. K. Bandgar

WEBSITES VISITED

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www.finance.indiamart.com/india_business_information/sebi.html

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