Mumbai: A high level committee, formed by the Reserve Bank, Tuesday pitched for replacing the present compliance-based approach with a risk-based supervision system to assess commercial banks.
While the present risk evaluation of commercial banks through the 'CAMELS' system is a point in time assessment, the proposed risk-based supervision system (RBS), if implemented, will take into account both present and future risks, the Committee headed by RBI Deputy Governor KC Chakrabarty said.
The 'CAMELS is an international rating system where regulatory authorities rate banks according to the following six factors -- Capital adequacy, Asset quality, Management quality, Earnings, Liquidity and Systems and controls.
The committee has also recommended that under the RBS, supervisory stance will be determined by the probability of failure of a bank and its impact on financial system.
"Under RBS, the supervisory stance would be determined based on a supervisory analysis of probability of failure of a bank and the likely impact of its failure on the banking or financial system.
"Thus, the periodicity or intensity of on-site inspection of a bank will depend on its position on the risk-impact index matrix rather than its volume of business," an RBI release said.
As per the committee, a bank can be placed under the prompt corrective action (PCA) framework intervention, if required, which will be based on the supervisory rating and the risk-impact score of the bank.
The committee has also pitched for facilitating lateral hiring of specialists to build up supervisory skills.
First Published: Wednesday, June 20, 2012, 00:33