The National Bank for Agriculture and Rural Development (Nabard) is exploring risk-based supervision of the entities it regulates, including cooperative banks and regional rural banks, and is putting in place a framework for this, said chairman Harsh Kumar Bhanwala.
Nabard’s online portal, Ensure, which hosts data of all cooperative banks, can track the performance of all entities it regulates and is now looking to use this data to start risk-based supervision, said Bhanwala. However, the idea will have to be approved by its board.
“We are getting all the information upfront. So the entire data on which we base our probes and inspections is available on the portal. These include information on their assets, bad loans, asset liability management, and interest rates, and we are therefore better prepared to carry out our inspections."
The whole process, he said, could be implemented in three years as it is in an experimental stage.
“These will ultimately pave the way for risk-based supervision of these banks, cooperative banks, and regional rural banks. Maybe in times to come, risk-based supervision, that the RBI extended to commercial banks will also be extended to entities we regulate and we are working on this initial experiment on the framework for it," he said.
Nabard has started assessing the risky areas of such banks and based on the findings, it will initiate probes, he added. At present, the inspection of each bank takes about 20 days, but through risk-based approach, Nabard will be able to single out the riskier ones and devote more time to these than the stronger banks.
“The advantage of risk-based supervision is that you can focus more on the problem areas of the banks. You differentiate the extent of risk from one bank to another and you have a differentiated approach for supervising them," said Bhanwala.
In August 2011, the RBI had formed a committee for review of supervisory processes for commercial banks chaired by the then deputy governor K.C. Chakrabarty. In June 2012, the committee suggested risk-based supervision, which focuses on evaluating both present and future risks, identifying incipient problems and facilitates prompt intervention, and early corrective action. The other kind of inspection is called CAMELS, which is a compliance-based exercise. CAMELS stands for capital adequacy, asset quality, management, earning, liquidity and system and control.
Meanwhile, based on Nabard’s suggestion, state governments in Kerala and Punjab are in the process of merging their respective district central cooperative banks (DCCBs) into two state cooperative banks. “We had discussed with certain state governments on consolidation of various district cooperative banks into a state cooperative bank since the small size of these institutions pose a major risk to the system," said Bhanwala. “At least two governments, Kerala and Punjab, have initiated this amalgamation. These states prepared a proposal and we have scrutinized it and sent it to the RBI. While Kerala has 14 DCCBs, Punjab has 16," he said. There are around 370 DCCBs in India. Nabard has also set aside ₹200 crore into a fund launched by its subsidiary Nabventures for equity investments into agriculture- and rural-focused startups, Bhanwala said. A few banks and financial institutions have evinced interest in investing in the fund and 20 startups have been shortlisted for investment.