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January 19, 2018

IMF published report on the Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision (BCPs), as part of the Financial Sector Assessment Program (FSAP) on India. The report highlights that RBI is to be commended for the remarkable progress in strengthening banking supervision since the last FSAP.

The report reveals that supervision and regulation by RBI remain strong and have improved in recent years. A key achievement is implementation of a risk-based supervisory approach that uses a complex supervisory assessment framework to guide the intensity of supervisory actions and the allocation of supervisory resources. Also, most of the Basel III framework (and related guidance) has been implemented and cooperation arrangements, both domestically and cross-border, are now firmly in place. The system-wide asset quality review (AQR) and the strengthening of prudential regulations in 2015 testify to the authorities’ commitment to transparency and a more accurate recognition of banking risks. Prudential regulations are broadly aligned to the requirements of the BCP.

The Detailed Assessment report also adds that the introduction of IFRS 9 provides an opportunity to strengthen loan classification and provisioning rules. RBI may need to maintain a prudential filter as a regulatory floor after the introduction of accounting expected loan-loss provisioning in April 2018. In this context, RBI should review its existing classification and provisioning rules to ensure they are calibrated in line with actual losses and cure rates. RBI should also reassess the need for amending special loan categories that could weaken the loan classification and provisioning adequacy. Given the high level of nonperforming assets (NPAs) in the system, the authorities should consider a more proactive approach to ensure that banks, via adequate provisioning, have proper incentives to tackle NPAs and to free up balance sheets for more productive lending.

 

Related Link: Detailed Assessment Report

Keywords: Asia Pacific, India, Banking, FSAP, BCPs, NPLs, IFRS 9, RBI, IMF

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