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RBI Inspection of Urban Co-operative Banks under B.R.

Act 1949 (AACS)

N.Gopal
Deputy General Manager & MOF
CAB Pune
Reserve Bank of India

Background

Urban cooperative credit societies organized on


community basis
Lending operations confined to meeting the
consumption oriented credit needs of their
members.
There was no well defined concept of UCB

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Growth and Development

1931 to 1966
Various committees and study groups commended
the working of the UCBs in extending support to
the micro agencies to whom the commercial
banking sector was quite wary of lending.

Despite absence of State support (unlike its


counter part viz. agricultural cooperative credit
sector) the UCB sector as a whole registered a
fairly good rate of progress.

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Gaining Importance

Economic boom created by the World War II


The urban co-operative banking sector received
tremendous impetus and started diversifying its
credit portfolio, branching out from meeting
traditional consumption oriented credit needs to
catering to the needs of artisans, small businessmen
and small traders.

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Background. Cont.

Steady growth in volume of deposits and significant


increase in the operations of the UCBs led to the
demand for extension of deposit insurance.
Bitter experience of failure of Palai Central Bank in
early 1960s.
Call for depositor protection in the cooperative
sector gained ground
Can there be some of protection to the depositors
upto a certain amount?
Can the DICGC play this role?
DICGC is an organization under RBI- Does RBI need
to have some sort of control?
Reserve Bank of India

Amendment to B.R. Act 1966


Extension

of deposit insurance presupposes certain


control over UCBs by the RBI.
Some provisions of the BR Act,1949 were made
applicable to the UCBs in March 1966 after intense
deliberations among the State Governments, RBI and the
Government of India.
Sec 56 added to the act and some portions of the B.R. Act
1949 made applicable to Cooperative Banks through this
section.
The cooperative banks came under dual control of the
RBI and the State Governments
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Relevant sections of B.R. Act 1949

Section 56 The RBI exercises its regulatory,


supervisory and developmental control on UCBs
through the applicability of select provisions of the
parent Act through this Sec
Section 5(ccv) Definition of UCBs - UCBs as a
Cooperative Society, other than a primary
agricultural credit society, the principal business of
which is to conduct banking business, the paid-up
share capital of which is not less than Rs. 1 lakh, and
the bye-laws of which do not permit any other
cooperative society as its member. However, if a
Cooperative Bank has subscribed to the share capital
of such cooperative society out of funds provided by
the State Government then it can become a member
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Relevant provisions of B.R. Act 1949

Section 11 Minimum Paid-up Share Capital


The minimum paid-up share capital required for
UCBs to carry out banking business is Rs. 1 lakh.
Section 18 Cash Reserve Non-Scheduled UCBs
are required to maintain Cash Reserve Ratio on a
daily basis in the following assets
Section 20 Restriction on Loans and Advances
No UCBs are allowed to grant unsecured loans and
advances Directors and to any firms where any of
the Directors is having interest. Presently there is a
complete ban on loans and advances to Directors
and their relatives.
Section 22 and 23 Bank and Branch Licensing
of UCBs
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Relevant provisions of the B.R. Act 1949

Section 24 Statutory Liquidity Ratio - Every UCB


(scheduled/non-scheduled) is required to maintain
liquid assets in the form of cash, gold or
unencumbered approved securities which should not
be less than 25 per cent of the total of its demand and
time liabilities.
Section 29 Account and Balance Sheet At the
end of each year UCBs are required to prepare
balance-sheet and profit and loss account as on the
last working day of the year in the forms set out in
the Third Schedule or is near thereto.
Section 35 Inspection of UCBs
Section 35 A Power of the Reserve Bank to give
Directions
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Relevant provisions of the B.R. Act 1949

Section 36 Further Powers of Reserve Bank


Section 46 Penalties
Section 47 Cognizance of Offences - No Court
shall take cognizance of any offence punishable
under Section 46 except upon complaint in writing
made by an officer of RBI.
Section 47 A Power of Reserve Bank to Impose
Penalty enables the RBI to levy penalty specified
under sec 46.

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Division of Responsibilities
Reserve Bank Control and
Regulation (Banking related
functions)

State Government Jurisdiction


Powers under State Co-operative
Societies Act.

Licensing,
Branch Licensing,
Area of operation,
Inspection
Directions
Imposition of Penalty
Prudential Norms
Capital, (CRAR)
Asset Quality,
Earnings,
Liquidity, CRR and SLR
Systems and Control,
Customer Service etc

Incorporation, Registration
Constitution of Board,
Removal of Directors
Superseding the Board
Audit,
Enquiry into the conduct of
Directors
Winding up

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Objectives of RBI inspection

Inspection can be under section 22 and 35 of BR Act 1949


(AACS).
Normally conducted under section 35 to ensure that
objectives of licensing under section 22 are fulfilled and
continue to be fulfilled.
Objectives are:
the co-operative bank is or will be in a position to pay its
present or future depositors in full as their claims accrue
[Section 22 (3) (a) of BR Act (AACS)]

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Objectives of licensing

The affairs of the co-operative bank are not being or are


not likely to be conducted in a manner detrimental to
the interests of its present or future depositors
[Section 22 (3) (B)]
the general character of the proposed management of
the co-operative bank will not be prejudicial to the
public interest or the interest of its depositors;
The co-operative bank has adequate capital structure
and earning prospects [Section 11(1) ]
The public interest will be served by the grant of a
license to the co-operative bank to carry on banking
business in India
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Objectives of licensing cont..

Having regard to the banking facilities available in the


proposed principal area of operations of the cooperative bank, the potential scope for expansion of
banks already in existence in the area and other relevant
factors, the grant of the licence would not be prejudicial
to the operation and consolidation of the banking
system consistent with monetary stability and economic
growth and
Any other condition, the fulfilment of which would, in
the opinion of the RBI, be necessary to ensure that the
carrying on of banking business in India by the cooperative bank will not be prejudicial to the public
interest or the interests of the depositors.
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RBI Inspection
i.
ii.

iii.

iv.

v.

vi.

Evaluation of its financial safety and soundness,


Review of compliance with the BR Act (AACS); specific
directions issued there under as well as supervisory
guidance conveyed on specific policies
Compliance with the prudential norms appraisal of the
soundness of the banks assets, analysis of the key
financial factors such as capital, earnings and liquidity
and determination of the banks solvency,
Appraisal of the quality of board and management and
assessment of the quality of its management team
Evaluation of its policies, system management, internal
operations and controls,
Identification of areas where corrective action is
required to strengthen the institution and improve the
quality
of its
performance
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Bank
of India

Core Assessment of RBI inspection


A.

Financial condition and performance

B.

Management, systems and controls

C.

Regulatory and other guidelines compliance.

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RBI inspection-types

On-Site Inspection- Periodical inspection


Off-Site inspection OSS
Fortnightly, quarterly, monthly returns, statements etc.
Special scrutiny

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On-Site Inspection
Four key elements
I.
System of continuous / on going supervision;
II.
Focussed monitoring and examination powers;
III.
Discrimination between sound and unsound banks; and
IV.
Enforcement of regulatory requirements and correction
of deviations.

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Scrutiny under section 35 (1A) (a)

The on-site inspections could be followed up by appraisals


of specific portfolios in between two inspections or short
monitoring visits for follow up or review of selected areas
of concern arising from a previous inspection, any returns
/ reviews, commencement of new business or even market
intelligence reports.
Scrutinies in terms of Section 35(1A)(a) of the BR Act
(AACS).

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Failure to furnish information

Attention of the Registrar (RCS)

Attention of the executives to section 35(2)

Penalties under section 46(2)

Power to examiner the executives/officials under oath


section 35(3)

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RBI inspection, RCS audit, Statutory Audit

RBI inspection statutory under Section 35 of the BR Act


(AACS)
to ensure their sound financial position, satisfactory
conduct of affairs and generally to tone up the whole
organization.
RCS audit
to ensure proper observance of the provisions of the
Cooperative Societies Act and Rules.
Statutory Audit
To ensure that the Balance sheet is drawn up as per the
Accounting standards
Whether the balance sheet represents the true and fair
value of the assets and liabilities
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Statutory Audit

Whether the balance sheet has been properly drawn up.


Whether the profit and loss account shows a true position
of profit or loss for the period concerned.
Whether proper books are maintained.
Whether the assets shown in the balance sheet as at the
year ending date physically exist and their condition is
satisfactory.
Whether documents obtained are complete and
enforceable.
Whether the bank is having proper internal control
system.
Whether the transactions of the banks are within the
powers of the bank as stipulated in the bye-laws / Act /
Rules.
Whether the bank is complying with the instructions of
the regulators such as RBI / RCS etc.
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Pattern of RBI inspection Banks

CAMELS
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Capital

Whether the Bank has the capital requirement as per


the laid down prudential norms
Whether the bank has the CRAR as per BASEL I
norms 9%
What is the quality of capital- Tier I and Tier II
Is the capital being augmented- growth in Capital vis-vis its business expansion
Rate of growth of capital vis--vis its Risk Weighted
Assets
Are the components considered in capital really
capital in nature?
What is the Networth Solvency angle
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Capital cont..

Computation of Networth
Transfer from various reserves
IFR and IDR
Transfer of certain Items to Reserves- DDs Payable etc
Unclaimed Deposits
Transfer of IFR to P & L account to show increased profits

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LIABILITIES : CAPITAL

TIER I CAPITAL / CORE CAPITAL

Authorized Capital
Paid up share capital

Free reserves
Capital Reserves from surplus from sale of assets
TIER II CAPITAL

Provisions
Long term Deposits
Investment Fluctuation reserves

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LIABILITIES : DEPOSITS/BORROWINGS

Composition : High Cost / Low Cost


Know Your Customer
Window Dressing
Cost of Deposits
Borrowings

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LIABILITIES : OTHER LIABILITIES

Bills payable
Branch Adjustments / Inter-office adjustments
Interest Payable
Suspense / Sundry Creditors
Provisions

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Asset quality

Realizable value of the assets


Extent of Impaired Assets
Provision for Impaired Assets
Provision for Standard Assets
Adherence to Prudential Exposure Norms
Single borrower exposure 15%- Capital Funds
Group borrower exposure 40% - Capital Funds
Credit Appraisal- Procedure for loan sanction
Different types of loans and advances- sample
examination of the appraisal notes
Connected lending- loans to Directors
Quality of Post sanction supervision and monitoring
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Asset Quality

Asset Classification & Provisioning

Age wise classification of Impaired Assets


Provision for Standard Assets
Provision for Impaired Assets
Restructuring of Accounts
Provision for restructured assets
Upgrading of Impaired Assets

Loaning process, Credit Appraisal, Follow-up

Loan Policy- review of policy periodically


Adherence to the loan policy of the bank
Contents of the loan policy- exposure limits,
Credit rating and pricing of loans
Post sanction and monitoring, follow-up supervision etc
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Asset Quality

Categorization of Advances

Off Balance Sheet Exposures

Commercial Real Estate, housing loans


Priority Sector advances
Unsecured and Secured Advances
Gold Loans
Personal loans
Director Related loans- Prohibited
Loans to Associate or Nominal Members- restricted
Government Guaranteed Loans
LCs, BGs, etc

Interbank Exposure Limits


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Sampling of Accounts

High value loan accounts covered, irrespective of the branch


Top 20 accounts in each standard/NPA loan category
Security-wise; few accounts from each category
Loan statement beyond cut off point decided by the IO

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CRITICAL AREAS

Underestimation of NPAs
Erroneous classification of NPAs
Adequacy of Provisions
Diminution in value of various assets particularly
investments, deposits with banks
Interbank Exposure limits
Government Securities Transactions
Non-SLR investments
Exposure to real estate sector

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ASSETS --CASH

Custody
Strong Room
Safe keys
Insurance
Security Arrangements
Checks and Balances

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ASSET QUALITY--SLR

Investment in Govt Securities- Close look since 31 March


2012.
Fixed deposits with DCCBs / SCBs- Interbank exposure
norms
Eligibility of securities / Bonds- only AAA rated Non-SLR
investments
Unencumbered securities

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ASSETS LOANS & ADVANCES

Various Exposure Limits


Loans to Non-members
Loans by guarantee of Employer
Prohibition on loans to directors:
Date of effect
Continuation of earlier limits
Relatives of directors
Cash Credit, Term Loans,
End use of Funds
Ever-greening
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Management

Composition of the Board- Elections-Democratic


process
Professional Directors on the Board
CEO and his functioning
Board and at its functioning
Various Committees functioning of the committee
Decision making in the Board

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Earnings

Net Profit- growth and trend


Net Interest Income
Net Interest Margin
Non-Interest Income
Return on Assets ROA
Return on Equity
Provisioning and provision coverage
Dividend Distribution
Transfer to Statutory Reserve

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Liquidity

Asset Liability Management system


Measurement of Liquidity- Flow Approach
Measurement of Liquidity-Stock Approach
Preparation of Liquidity measurement StatementsSLS, DLS
Interest Rate Risk Management
ALM policy
ALCO
Breach of Regulatory time buckets in liquidity
CRR and SLR compliance
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Systems

Efficacy of Internal controls, checks and balances


Efficacy of Internal
Inspection machinery
House keeping Balancing of books
KYC/AML- systems and procedures- adherence to
guidelines, submission of CTRs and STRs, Risk
Profiling of customers- KYC of old accounts
Frauds- reporting mechanism
Customer service

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PERIODICITY

Scheduled
--- Annual
Non-scheduled Grade C & D --- Annual
Non-scheduled A & B
24 months

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Post inspection

Finalizing the Inspection report


Principal Inspecting officer to address the Boarddiscuss the report
Issue of the inspection report
Seek Compliance
CAMELS rating
Apply SAF- if warranted

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COMPLIANCE

First compliance within 6 weeks from the date of


receipt of the Inspection Report
To verify previous inspection reports
Priority Sector/ Weaker Section Advances
Customer service
Technological up-gradation
Submission of various statutory returns / statements
Pitfalls to be avoided in compliance
Noted for future
Will do
Vague submissions

Incomplete submissions etc


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Supervisory action framework

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Supervisory action framework

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Thank You