It is difficult to imagine what would have been the position if the computerized off-site system for bank monitoring was not instituted in RBI seven years ago. Though in the first two years, the system was getting stabilised, it is from the year 1997, Off-site Monitoring and Surveillance System (OSMOS) has become fully operational and during the last five years, the Department has derived the benefits out of it in a big way. Indeed, during these seven years the OSMOS in Department of Banking Supervision has greatly helped the Department in enhancing the capability to exercise its supervisory role. Further, within a period of three years of its operation, an opportunity was taken to upgrade the system to take care of the changing requirements of banking supervision. With the result, the scope and coverage of off-site surveillance was enlarged. In this article, an attempt has been made to go back and see how the system was set up, what benefits have been derived so far and what further proposals are in store for the future. Our experience with OSMOS in the Indian context perhaps will prove to be an adaptable model for many Central Banks, particularly in the developing countries. One of the important functions of Central Banks all over the world is to regulate the financial system, ensure financial stability and thus help economic growth of the country. While several central banks are directly involved in the supervision of the banking system and other financial institutions, others have created separate regulatory organisations to carry out this function. Illustratively, while several countries like New Zealand rely pre-dominantly on off-site surveillance, in other countries, including USA, on-site inspection is an important tool for bank supervision. Irrespective of the regulatory set-up, on-site examinations coupled with off-site surveillance and monitoring have become the major tools of bank supervision. The system in India is a combination of on-site inspection and off-site surveillance with bias towards the former.
Setting up of the Board for Financial Supervision (BFS)
Post-1992 irregularities in the securities market, a need was felt to create a separate regulatory/ supervisory body to regulate the financial system. Accordingly, the BFS was setup in the year 1994 on par with a committee to the central board of the Reserve Bank. The Governor, Reserve Bank of India was designated as the Chairman. While one of the Deputy Governors is nominated as the Vice-Chairman, four directors from the Central Board are appointed as members of BFS. Introduction of OSMOS
As early as 1991, the Narasimham Committee (1991) had recommended setting up of an Off-site monitoring function to strengthen the financial sector supervision. The recommendation also found favour in the Report of the Padmanabhan committee (1995). Taking cue from these recommendations, the BFS, in its first meeting held in December 1994, directed that an off-site supervision system be set up within the Reserve Bank to collect financial information from banks on a quarterly basis so as to assess the financial health of the banks in between on-site inspections. The objectives of setting up an off-site supervision process are broadly five-fold:
To provide on-going information about the health of banks in-between on-site inspections;
To build a memory on the supervised institutions;
To capture systemic trends in banking and to support policy initiatives;
For better focus of supervisory effort and to optimise resource allocation; and
Identification of banks showing financial deterioration and to act as an Early Warning System (EWS) and as a trigger for on-site inspections.
After studying the international best practices, a circular was issued to banks on February 28, 1995 introducing off-site prudential supervisory reporting system. To begin with, a set of...