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
Working Group on Valuation Adjustment and Treatment of Illiquid Positions
116. It was indicated in the Monetary Policy Statement of April 2010 to constitute a Working Group to recommend an appropriate framework for valuation adjustment for various risks/costs and treatment of illiquid positions. Accordingly, a Working Group (Co-ordinator: Shri P. R. Ravi Mohan) was set up in June 2010 with members drawn from the Reserve Bank, IBA, FIMMDA, Foreign Exchange Dealers Association of India (FEDAI) and select banks. The Working Group submitted its report in September 2010. The Group has given recommendations on a wide range of issues, including identification of illiquid positions, adjustment for illiquidity and valuation adjustment for unearned credit spread and closeout costs for the derivative portfolio of banks. The recommendations of the Group are under examination.
Convergence of Indian Accounting Standards with International Financial Reporting Standards
117. As indicated in the Monetary Policy Statement of April 2010, a Working Group (Chairman: Shri P. R. Ravi Mohan) was constituted to address the implementation issues and facilitate formulation of operational guidelines in the context of convergence of Indian Accounting Standards with the International Financial Reporting Standards (IFRSs) and prepare banking and NBFCs and UCBs to adhere to the roadmap of implementation. As per the roadmap, all scheduled commercial banks will convert their opening balance sheet as on April 1, 2013 in compliance with the accounting standards converged with the IFRS. As regards NBFCs and UCBs, a gradualist approach has been adopted.
Introduction of Bank Holding Company/Financial Holding Company in India
118. In pursuance of the announcement made in the Monetary Policy Statement of April 2010, a Working group (Chairperson: Smt. Shyamala Gopinath) has been constituted to examine the introduction of a holding company structure together with the required legislative amendment/framework. The work is in progress.
119. In line with the steps taken by the global community and the initiatives taken by G-20 nations, draft guidelines for private sector banks and foreign banks with regard to sound compensation policy were framed and placed on the Reserve Bank’s website in July 2010 for public comments. These guidelines are largely based on the FSB’s principles on sound compensation practices. The guidelines cover effective governance of compensation, alignment of compensation with prudent risk-taking and disclosures for whole time directors/chief executive officers, risk takers of banks as well as staff in the audit, compliance and risk management functions. Comments received from various banks/organisations/individuals are being examined. Accordingly, it is proposed:
to issue final guidelines on compensation practices by end-December 2010.
Licensing of New banks
120. The Hon’ble Finance Minister in the Union Budget 2010-11 had mentioned that the Reserve Bank would consider giving some additional bank licences to private sector players. Consequently, the Monetary Policy Statement of April 2010 indicated that a discussion paper would be prepared marshalling the international practices, the Indian experience as also the extant ownership and governance (O&G) guidelines for placing it on the Reserve Bank’s website by end-July 2010 for wider comments and feedback, after which the guidelines will be finalised. Accordingly, the discussion paper was put in public domain in August 2010. Based on the comments and suggestions received from various parties and discussions held with major stakeholders in October 2010, it is proposed:
to put the draft guidelines in public domain by end-January 2011 for public comments.
Presence of Foreign Banks in India
121. It was indicated in the Monetary Policy Statement of April 2010 that drawing lessons from the crisis, a discussion paper on the mode of presence of foreign banks through branch or wholly-owned subsidiary (WOS) would be prepared by September 2010. Accordingly, a discussion paper in consultation with the Government on the form of presence of foreign banks in India is in final stages of preparation.
Capacity Building in Banks
122. Banks should gear themselves up to meet various challenges in the coming years. In particular, the implementation of Basel III by all banks, the need for large and internationally active banks to move to the advanced approaches under Basel II and convergence with IFRS as on April 1, 2013 would require banks to upgrade their technology and risk management capabilities. Banks should undertake a review of the skills required and take up capacity building in right earnest and in a time bound manner. The Reserve Bank will also intensify its efforts in this regard by undertaking more capacity building programmes for the banking sector in the coming years.
Information Technology and Related Issues: Enhancement to the Guidelines
123. It was proposed in the Monetary Policy Statement of April 2010 to set up a Working Group on information security, electronic banking, technology risk management, and tackling cyber frauds. Accordingly, a Working Group on Electronic Banking, Controls, Governance and Technology Risk Management Standards (Chairman: Shri G. Gopalakrishna) was constituted. The recommendations of the sub-groups on technology, governance, operational issues, legal and educational aspects set up by the Group were discussed by the Working Group and are now being formalised. The Working Group is likely to finalise its report by end-November 2010.
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