5cd134c3-19f0-4114-a591-8e8ecbcab83a.pptx

PP

1. Supervisory Functions of NABARD Presented by Shri K S Raghupathi, CGM, DoS, HO for officers appearing for interview – 18 Oct 2021

2. Statutory powers vested under Section 35(6) of BR Act, 1949 Supervision Strategy (Off-Site and On-Site) Guidelines issued by RBI, NABARD, Govts Supervisory findings shared and recommendations are made to RBI NABARD’s Role of Supervision Board of Supervision ( BoS ) for Rural Cooperative Banks and RRBs Internal Committee of the Board provide directions and guidance on Inspection and Supervision our top management, ED(RBI) and a Coop Bank expert are members

3. Objectives of Supervision To protect the interest of present and future depositors To examine the financial soundness of the banks To ensure business conducted by banks is in conformity with Provisions of relevant Acts, Rules, Regulations, Bye-Laws To ensure compliance to instructions, guidelines, directions etc, issued by NABARD, RBI, Government Section 22(3)(b) of BANKING REGULATION ACT, 1949 “that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors”

4. Sr. Supervised Entities (SE) No. Frequency 1 RRBs 43 Annual 2 StCBs 34 Annual 3 DCCBs 352 Annual * 4 SCARDBs 10 Annual   Total 439 *Banks with business of more than Rs.3000 crore C & D rated banks (including Sec 11 Non Compliant Banks) NABARD Supervised Entities (SEs)

5. Supervision performed through On-site Inspection Off-site Surveillance Supplementary appraisals Portfolio Studies CAMELSC Model of Inspection adopted Banks are awarded Supervisory rating of A, B+, B, C & D Present Approach to Supervision Sr. No. Key Factor Weightage assigned to the Key Factor (%) StCBs / DCCBs RRBs 1 C apital adequacy 15 15 2 A sset quality 15 15 3 M anagement 10 15 4 E arnings 10 15 5 L iquidity 15 15 6 S ystems 20 15 7 C ompliance 15 10   Total  100 100

6. Composite Supervisory Rating scale Rating Marks Implication A 75 & above Fundamentally sound bank with sound banking operations B + 60 & below 75 Sound banking operations but with moderate weaknesses B 50 to below 60 Financial, operational or compliance weaknesses giving rise to Supervisory concerns C 40 to below 50 Financial, operational or compliance weaknesses likely to culminate into serious Supervisory concerns D Below 40 Serious financial, operational and managerial weaknesses exist that give rise to the possibility of failure in the near future.

7. Sr. Supervised Entities No. 1 RRBs 43 2 StCBs 34 3 DCCBs 243 4 SCARDBs 9   Total 329 *Banks with business of more than Rs.3000 crore C & D rated banks (including Sec 11 Non Compliant Banks) Inspection Budget for 2021-22

8. DoS’ Inspection-plus Activities Investment Review CMA Review, CMA Monitoring Centralised Frauds Management Cell: Frauds Review & Studies Compliance Review, Pre-Compliance Meeting, Proactive Supervision Cyber Security - CSITE Complaints Management Feedback to banks: PAR, Stress testing Merger of ST structure banks (Kerala, Punjab.....Policy framework) Capacity Building – Training, RSS, DoS Resource Room, DOS Xchange Training, Workshops for Supervised Entities Coordination meeting with RBI, Coordination with GOI Departments

9. For the Bank Inspected and its Stakeholders Serves as a Diagnostic Report on the Bank’s Performance Vibrant Management can take advantage of the Diagnosis for Rectification of Deficiencies for Improving the bank’s Financial Performance For Regulator A comprehensive and critical review of Inspected Bank with Recommendations for Regulatory Action Take Away from Inspection

10. Take Away from Inspection (cont’d..) For NABARD DoS : further refinements for Supervision Policies and Strategies IDD: institutional development initiatives such as revival of weak banks, improving governance, policy advocacy Business/Promotional Departments The policies of business departments (DOR, BID) are dependent on Critical Parameters such as Net NPA, Gross NPA, CRAR, etc Diagnosis of Weaknesses of Banks in the Statutory Inspection enables Development Departments devise policies for Grant and other support (IDD, DFIBT, MCID, OFDD, FSDD)

11. Inspection Documents Inspection Report (with Appendices I to VII) - to Bank Recommendatory Note (with Annexures), RoR / HoR - to RBI Special Notes (internal & external) Executive Summary (internal) Letter of Supervisory Concern - to the Bank & Stakeholders Supervisory Rating - to the Bank Inspection Report Rating (internal) Qualitative Scrutiny observations (internal)

12. Key Achievements in FY 2020-21 Inspection of 302 budgeted inspections conducted Four Meetings of BoS held in 2020-21 Coordination Meetings with RBI (Chairman level and CGM level ) Two major projects taken up Risk Based Supervision (Enhanced CAMELSC) SuperSoft – Software for Bank Supervision

13. Initiatives Conduct of Inspection in Covid environment – flexibility in approach Introduction of Supervisory Tools Matrix of Policies (Covering compliance to Gamut of Policies) Vulnerability Index for Cyber Security Frame Work (VICS) Vulnerability Index For Fraud (VINFRA) Governance Index (by IDD i/c /w DoS ) Guidelines for Grievance Redressal /Complaints management CMA Monitoring – SOP Updation of Inspection Guidelines (RCBs, RRBs & SCARDBs)

14. Action Plan for FY 2021-22 Inspection – Budget 329 inspections Pilot roll out of “Enhanced CAMELSC” Pilot run of SuperSoft Training and Capacity Building of DOS officers and Officers of RRBs and RCBs Mutual Evaluation by Financial Action Task Force (FATF)

15. Action Plan for FY 2021-22 5. Coordination with RBI for decision on Policy issues : Revision of Credit Monitoring Arrangements (CMA) Supervisory Action Framework – Prompt Corrective Action (SAF-PCA) for Rural Cooperative Banks (RCBs) Accounting standards for RCBs Master Circular on IRAC norms for RCBs and RRBs Refinement in compliance norms for Sec 42 (6)(a)(ii) of RBI Act & Sec 22 (3) (b) of BR Act vii. Persisting violation of statutory provisions - Recommending regulatory action

16. Action Plan for FY 2021-22 6. Strengthening CSITE Cell at DOS; Cyber Security Framework at banks 7. Strengthening Frauds Monitoring and regulatory action 8. Digitisation of complaints management

17. Recent Developments

18. 1. Amendment to Banking Regulation Act, 1949 GoI had amended some provisions of B R Act, 1949 and vide Gazette Notification dated 23 December 2020 these were made applicable to StCBs and DCCBs w.e.f 01 April 2021. To provide for better management and proper regulation of Cooperative Banks For - Increasing professionalism, Improving governance, Access to capital, Ensuring sound banking system

19. 1. Amendment to Banking Regulation Act, 1949 (Cont’d) Management 51% of members to have special knowledge RBI empowered to remove Chairman if he does not fit and proper criteria RBI can reconstitute the Board if it does not conform to all requirements Banks to be managed by Whole Time Chairman; if chairman is appointed part time, then the whole affairs to be managed by MD

20. 1. Amendment to Banking Regulation Act, 1949 (Cont’d) 2. Issuance of Shares and Securities – with prior approval of RBI 3. Restriction on loans and Advances 4. Audit – RBI approval required for appointing, re-appointing or removal of an auditor 5. Amalagamation or Reconstruction – RBI is empowered to initiate a scheme for reconstruction or amalgamation of a bank 6. Voting rights – No person to have more than 5% shares of a banking company or voting rights

21. 1. Amendment to Banking Regulation Act, 1949 (Cont’d) Concerns raised by banks Status of existing Board – 51% with special knowledge, whole time Chairman, tenure of Director not to exceed 8 years In case of MDs on deputation, whether additional charge is permitted? Concept of voting rights of 5% Refund / surrender of capital

22. 2. Amalgamation of Cooperative Banks Cooperative Credit Institutions Two wings – one for ST and MT, other for LT Two structures – Three tier and Two tier 23 StCBs are scheduled

23. 2. Amalgamation of Cooperative Banks (Cont’d) Challenges in STCCS Dual control and interference in governance Weak financials Lack of trained manpower and professionalism Dominance of large farmers Frequent loan waiver Functional weakness Weakness in societies Falling share of agriculture credit Technology Integration

24. 2. Amalgamation of Cooperative Banks (Cont’d) Sl. No. Merits De-merits 1 Management – Professional Leadership Relationship with PACS 2 Advantages in cost structure Regional Feel and niche products 3 Technological aspects Corporatisation of the bank 4 New clients Small and Marginal Farmers 5 Improving efficiency Grievance redressal of small customers / borrowers 6 Better services to PACS Supervision over PACS 7 Regional Imbalance 8 Cartelisation

25. 2. Amalgamation of Cooperative Banks (Cont’d) Recent Developments RBI has issued guidelines with indicative benchmarks which include Detailed study of legal framework along with additional capital infusion strategy, assurance regarding financial support if required, projected business model with clear profitability and proposed governance model for the amalgamated bank; Scheme of amalgamation to be approved by requisite majority of shareholders; Proposal to be examined and recommended by NABARD

26. Credit Monitoring Arrangements (CMA) General Conditions Exposure norms uniform for both StCBs and DCCBs Norms applicable whether unit financed within cooperative fold or outside Norms not applicable to: Loan sanctioned/ outstanding to PACS Other credit societies for onlending purposes agricultural advances Cases where credit limits allocated directly by RBI like food credit loans and advances granted against security of bank's own term deposits

27. Proposed Individual/ Unit wise exposure norms (including Housing) Inspection Rating of RCB Individual Exposure (₹ lakh) Unit-wise Exposure as % to Capital Funds Present Proposed Present Proposed A 60 100 60 60 B+, B 40 60 50 50 C 25 35 45 45 D 25 35 40 40

28. Credit Monitoring Arrangements (CMA) (Cont’d) Repeated CMA violations are observed To regularize the violations in a time bound manner, an SOP has been formulated defining various stages of escalation and supervisory action for ROs to initiate

29. Credit Monitoring Arrangements (CMA) (Cont’d) Supervisory action proposed under 3 Stages spreading over 3 years Issuing letter on CMA violation to bank Conveying supervisory concerns to CEO Issuing caution letter to Board Recommending penalty to RBI Recommending issuance of directions to RBI Recommending suspension / supersession of Board to RBI / RCS Recommending RBI for cancellation of license

30. Credit Monitoring Arrangements (CMA) (Cont’d) Violation of CMA Norms – Escalation at different stages Stage Trigger Point Suggested action for ROs 1 First time violation RO to call for explanation from bank Advise bank to bring down excess Recommend the regularization proposal of bank to HO IO to submit special note on CMA 2 Violation for 2 years continuously (8 quarters) RO to call for explanation from CEO RO to conduct a special study Post-facto sanction Bank to be warned of penal action if violation persists IO to submit special note on CMA

31. 3. Credit Monitoring Arrangements (CMA) (Cont’d) Violation of CMA Norms – Escalation at different stages Stage Trigger Point Suggested action for ROs 3 Violation for 3 years continuously (12 quarters) RO to call for explanation from Chairman of the Bank IO to submit special note on CMA with details of action taken by the bank with specific recommendation based on which HO will recommend to RBI for regulatory action / issuance of directions

32. Agenda for the next 3-4 years (Cont’d) 1. Implementation of Cyber Security Framework in SEs CSITE Cell Established in NABARD to evolve guidelines for CSF in Supervised Entities and provide handholding support Help banks to draw a balance between Threat Perception and Cost Effectiveness of the CSF Guide and monitor the implementation of CSF by SEs Analyse Cyber incidents reported by SEs, take up IT Examination of banks and issue alerts and advisories Awareness building, Coordination for shared infrastructure

33. Agenda for next 3-4 years (Cont’d) 2. Robust Policy implementation and feedback mechanism 3. Stronger Supervisory focus – Compliance, Supervisory action on recalcitrant banks 4. CMA and other exposure ceilings – stricter regiment 5. Governance issues – Supervisory action 6. Reconciliation issues – Monitoring and Supervisory action 7. Robust Frauds and Cyber Threat Management 8. Grievance Redressal – electronic acquisition through websites

34. Agenda for next 3-4 years (Cont’d) 9. Devising / Refining Supervision Strategies for Inspection of Amalgamated / Merged Banks (Very Big in Size as well as Business) 10. Replacement of Fast Depleting Human Resources in the Area of supervision 11. Updating supervision strategy inkeeping with changing times a) Technology adoption b) Statistical Tools c) Data Analytics d) Automated Data Flow

35. Challenges faced by NABARD in Supervision Space - Internal Ageing and retiring manpower Technical subject – cannot plug and play with manpower Supervision is a skill developed ‘on the job’ – strategies for continuous learning and skill building Need commitment to learn and be updated People do not prefer to go on long term tour (health, work-life balance, outside food etc) RO priorities in placement of officers in DOS Training and Capacity Building – adopting innovative methods

36. Challenges faced by NABARD in Supervision Space - External CBS, Automation, Diversified electronic products and services Non technical officers, Ageing staff in SEs Implementation of Risk Based Supervision Increased cyber incidents, less vigilance, poor cyber security Poor internal checks and controls Increasing incidents of frauds, embezzlements Significant governance issues Compliance challenges Lack of fear – consequences of violations Data integrity CMA violations Deteriorating financial strength of banks – poor supervisory ratings

37. Thank you

38. Agenda for the next 3-4 years 1. Implementation of Risk Based Supervision (RBS) Working Group on RBS identified specific challenges faced by SEs in moving to RBS Limited Area of Operation Small loans spread over large number of accounts Low level of Rural Savings

39. WG-RBS – Major Recommendations 39 78 recommendations spanning Capacity building for the Supervisor and the SEs Policy measures for facilitating roll out of RBS Enhanced CAMELSC Model Construct Supervisory processes to be adopted Roadmap for roll out of RBS Roll out of Risk Based Supervision >>>>>>>

40. 40 Risk Based Supervision Model The model construct and the scoring mechanism for both Cooperative Banks a nd RRBs will be the same. The difference in the models will be reflected in the indicators as well as the scoring scale and weights assigned to the different risks and components of the model.

41. RBS -Supervisory Process 41

42. Roadmap for RBS 42

43. Implementation Timeline 43 Particulars 2020-21 2021-22 2022-23 2023-24 Preparatory work for ‘Enhanced CAMELSC’         Implementation of ‘Enhanced CAMELSC’ and preparatory work for RBS         Preparatory work for RBS and Pilot for RBS rollout         RBS rollout        

44. 44 RBS - Expected outcome Forward looking assessment of risks, and guide SEs to mitigate risks Encourage SEs to self evaluate position at regular intervals Peer review & industry benchmarks and external risks Major expected impact on Governance and Internal Checks and Controls Enhance efficiency and effectiveness of supervisory process Financially sound banks ; Protection of depositors interests

45. RBS Model of RBI and NABARD 45 RBI’s RBS NABARD’s RBS Introduced in 2013-14; Supervised Entities under BASEL 3 Supervised Entities under BASEL-1 Offer complex products and services Offer simpler products and services; Predominantly offering crop loans Comprises of 3 tranches – Quantitative, Qualitative and Compliance RBS model customized to the nature of Supervised Entities and their forms of business; Quantitative and Qualitative indicators RBS Score – 85%, 15% towards Governance Risk score 100%, deflators under Governance, Compliance and Audit with cap of 15% Software driven framework (SPARC) Software driven frame-work (proposed)