Second Quarter Review of Monetary Policy 2010-11
-Announced on the 2nd November 2010
Developmental and Regulatory Policies
V. Regulatory and Supervisory Measures for Commercial Banks
Prudential Norms on Financial Conglomerates
109. The Reserve Bank had constituted an Internal Group on the Supervision of Financial Conglomerates (FCs) in India. The Internal Group had made various recommendations for strengthening the supervision of the FCs, including changes in certain regulatory norms. The Annual Policy Statement of April 2009 indicated that the Reserve Bank was examining the recommendations of the Group from the regulatory and supervisory perspectives. To start with, it has been decided:
to implement the recommendations of the Group on (i) capital adequacy for FCs; and (ii) intra-group transactions and exposures in FCs.
Capital Adequacy for FCs
110. As per Basel II framework, investments in the equity of subsidiaries or significant minority investments in banking, securities and other financial entities, where control does not exist, together with other regulatory capital investment in these entities are required to be excluded from the banking group’s capital if these entities are not consolidated. The Group recommended that the threshold of significant influence/investment may be fixed at 20 per cent instead of the present 30 per cent. Accordingly, it is proposed:
that the entire investments in the paid up equity of the entities (including insurance entities), where such investment exceeds 20 per cent of the paid up equity of such entities shall be deducted at 50 per cent from Tier I and 50 per cent from Tier II capital when these are not consolidated for capital purposes with the bank. In addition, entire investments in other instruments eligible for regulatory capital status in these entities shall also be deducted at 50 per cent from Tier I and 50 per cent from Tier II capital; and
the deductions indicated above will also be applicable while computing capital adequacy ratio of the bank on a solo basis.
111. The capital adequacy requirement will be further calibrated after finalisation of the Basel III rules, as indicated earlier.
Intra-Group Transactions and Exposures in FCs
112. In order to limit the inter-connectedness between the bank and other group entities, it is proposed:
to put in place an appropriate limit for such transactions and exposures, both for a single entity and on an aggregate basis for all other group entities.
113. Detailed guidelines in this regard will be issued separately.
Principles for Enhancing Corporate Governance in Banking Organisations
114. The BCBS in October 2010 issued ‘Principles for Enhancing Corporate Governance’ for banking organisations. The Principles address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis. Taking into account different categories of banking organisations in India, the Reserve Bank has been taking appropriate steps to improve corporate governance standards in banks. Implementations of ‘fit and proper’ criteria for directors on the boards of banks and splitting of post of the Chairman and Managing Director in private sectors banks as per the recommendations of the Ganguly Committee (2002) are some of the notable steps taken by the Reserve Bank in this direction in the recent past, which have improved standard of corporate governance. However, a review of the corporate governance standard in the banks is necessitated in the light of the principles issued by the BCBS. Accordingly, it is proposed:
to take appropriate steps to fully align the corporate governance practices in banks in India with the principles enunciated by the BCBS.
115. Detailed guidelines in this regard will be issued separately.
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