RBI to rope in outside consultant to help supervise banks

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The Reserve Bank of India has decided to rope in a third-party consultancy firm to help it incorporate global best practices in its supervisory role and prepare the risk ratings for various banks in the country.

RBI currently conducts supervision of banks through an annual inspection of the banks and their offsite monitoring, but has now decided to rope in an outside agency to assist in its supervisory role in the wake of a sharp growth in the Indian banking sector in the past few years.

The third-party consultancy firm would help RBI benchmark the global best practices in supervisory processes, develop risk profile templates and risk rating of commercial banks, and prepare a supervisory manual for conducting risk-based Supervision system.

RBI would follow another financial sector regulator Sebi, which regulates the capital markets, in bringing on board a third-party consultant to help overhaul its oversight and policy-making functions, as also its organisational structure.

The central bank has invited expressions of interest from interested parties till the middle of this month, after which it would short-list the entities for further due diligence and the final selection of a consultant, a senior official said.

RBI is responsible for supervising various commercial banks and financial institutions in the country with an objective of assessing their financial soundness, solvency, liquidity and operational viability.

A High Level Steering Committee has been already been put in place by RBI to review its existing supervisory processes for commercial banks.

Now, RBI is seeking to make a realistic assessment of the potential risks facing the banks and their ability and preparedness to mitigate various risks posed by the emerging changes in the global and domestic banking arena.

Among other activities, the consultant would be required to develop risk profile templates for different types of risks having forward looking elements.

The template should be capable of generating an objective measure of 'net risk' for the bank by considering the inherent risks and existing controls for each type of risk.

Besides, the consultant would develop 'an objective risk rating system', which would incorporate risks captured from these templates, the existing supervisory system, the off-site and on-site assessments of RBI, inputs from the banks' internal and external inspection/audit reports and other macro-economic parameters.

The ratings would also be used to create an impact matrix for assessing the overall risk of failure of a bank and the impact of any such failure.