Objective:

To enhance my knowledge on the concept of Supervision by Regulatory Authorities and, its significance & future prospectus with respect to Banks.

Executive summary
In recent years, there has been a change in banking supervisors reliance on audited information and in the nature of the major external audit firms. Concerns about the risk of audit failures, the global expansion of the major audit firms, increased complexity of both accounting standards and financial instruments, and the challenges associated with fair value estimation processes, which have been amplified by the current market crisis, have reinforced bank supervisors need to be confident of audit quality. This paper describes the Basel Committee on Banking Supervisions (the Committee) understanding of these circumstances and steps it intends to take regarding key findings. The current market turmoil and demand for increased transparency suggests that reliable, clear financial information supported by quality audits are key elements in enhancing market confidence. Bankers and supervisors reliance on external auditors expertise and judgments has increased Most of the worlds banking assets are audited, and supervisors are increasingly reliant on high-quality bank audits to complement supervisory processes
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An Introduction to Banking
Before we begin, let us all know what is banking after all?

A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. The most common type of bank account is a savings account. A savings account is meant to be like a safe: you keep your money in there for the sole purpose of security. Every bank has different saving account interest rates and finding one with a high rate will benefit you greatly. The other type of account that is most commonly used is a checking account. A checking account does not earn any interest and is mainly used for convenience. Accessing money in a checking account is easier than money in a savings account, because you can access it directly from a multitude of locations such as bars, movie theaters, etc. Also after opening a checking account you should receive a debit card, which can be used like a credit card/ATM card, but it will only allow you to use as much funds as you have in the account.

The banking sector is an integral part of the economy. Hence this sector plays a key role in the wellbeing of the economy. A weak banking sector not only jeopardizes the long-term sustainability of an economy, It can also be a trigger for a financial crisis which can lead to economic crises. The adverse outcomes of weak financial systems and their impact on economic well-being brought about renewed interest within the international financial community.

Risk management which is often used as a synonym of Asset and Liability Management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The Banking Sector in India

The Banking sector in India has always been one of the most preferred avenues of employment. In the current decade, this has emerged as a resurgent sector in the Indian economy. As per the McKinsey report India Banking 2010, the banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001, as compared to a 27 per cent growth in the market index during the same period. It is projected that the sector has the potential to account for over 7.7 per cent of GDP with over Rs.7,500 billion in market cap, and to provide over 1.5 million jobs.

Today, banks have diversified their activities and are getting into new products and services that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, investment banking, mutual funds, pension fund regulation, stock broking services, custodian services, private equity, etc. Further, most of the leading Indian banks are going global, setting up offices in foreign countries, by themselves or through their subsidiaries.

CHALLENGES

Competition In Retail Banking:

The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to Corporates. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail segments completely. The nimble footed new generation private sector banks have taken a lead on this front and the public sector banks are trying to play catch up. The PSBs have been losing business to the private sector banks in this segment. PSBs need to figure out the means to generate profitable business from this segment in the days to come. As Keynes wrote, Worldly wisdom teaches us that its better for reputation to fail conventionally than succeed unconventionally. Banks should avoid falling into this trap.

RISKS

Interest rate risk

Interest rate risk arises from any unmatched forward foreign exchange positions the bank may have. (The only true foreign exchange risk incurred here is the difference between the spot and forward trade in each currency. Should a bank buy spot Sterling against US Dollars and sell the identical amount of Sterling, say 3 months forward, the foreign exchange risk is the difference between the spot and forward US Dollar amounts. However, the bank will have a long GBP, short USD forward foreign exchange position. A movement of interest rates in either of these currencies over the period of the forward trade will generate a revaluation profit or loss). Although interest rate markets are not as volatile as foreign exchange, it is important that banks measure and monitor all risks.

Foreign exchange risk

Foreign exchange risk positions arising from a banks profit and loss account are more difficult to assess accurately. However those banks with material profit flows in foreign currency should carry out an assessment as to the benefits of hedging their risk. As such foreign exchange risk will normally emanate from outside the treasury area and, as a matter of best practice, the decision to hedge or not should be taken at a minuted Management or ALCO meeting.
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Liquidity Risk

Liquidity risk is the current and prospective risk to earnings or capital arising from a banks inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

Credit risk
A rising from the failure or default of counterparty. Technically, this is a credit risk where only one side of the transaction has settled (see settlement risk above). If counterparty fails before any settlement of a contract occurs, the risk is limited to the difference between the contract price and the current market price (i.e. an exchange rate risk).

Need for Regulation and Supervision of Banks

No one should have a more intense concern for both the profits and safety of a bank than its own shareholders. That is being the case, how can nonmarket governmental supervisors be any better at evaluating a complex banking organ-inactions risk exposures and need for capital than the managers of that organization itself? One reason why banking regulation and supervision are necessary is to redress moral hazard. In most countries, banks are protected by government safety nets, typically including a lenderof-last-resort facility and/or deposit insurance. Safety nets can produce suboptimal market results by inflating banks incentives to take risk. Banking regulation and super-vision must replace the market discipline removed by the safety net. Second rationale at least in the case of Federal Reserve banking supervision is that a Reserve bank carries on banking business, requiring careful attention to its own counterparty risk exposures. Each business day banks in this country make about $1 trillion in payments to one another. A substantial share of these involves near-instantaneous, irrevocable wire transfers of funds by the Reserve banks for their banking customers. In order to fund the wire transfers, the Reserve banks extend some-thing like $100 billion of daylight credit. They must manage their resulting risk exposure to protect themselves from any loss that would result if a customer bank were to fail without having repaid its daylight borrowing. Managing this exposure involves monitoring the credit quality of their customer banks and supervising their adherence to capital-adequacy requirements.

Role of Regulatory Authorities

Regulatory Authorities play an important role in regulating and controlling the activities in specialized areas. These regulatory authorities have been created by the Government of India under different Acts. They regulate the activities through the rules & regulations or guidelines issued from time to time. The Securities and Exchange Board of India was established by the Government under the SEBI Act, 1992. The Act has given wide powers to SEBI to regulate and control the capital market in market. The Reserve Bank of India Act1935 had given powers to RBI to regulate and control the affairs of Banks of India. The Insurance Regulatory and Development Authority Act, 1999 has also given wide powers to IRDA in order to regulate and control the insurance business in India.

Banking supervision must keep pace with technical innovations in the banking industry. The international Basel Committee on Banking Super-vision currently is reviewing public comments on its proposed new method for judging whether a bank maintains enough capital to absorb unexpected losses. This Economic Commentary Explains how existing standards became obsolete and describes the new plan.

Supervisory Process
The major instrument of supervision of the financial sector is inspection. The inspection process focuses mainly on aspects crucial to the banks financial soundness with a recent shift in focus towards risk management. Areas relating to internal control, credit management, overseas branch operations, profitability, and compliance with prudential regulations, developmental aspects, proper valuation of asset / liability portfolio investment portfolio, and the banks role in social lending are covered in the course of the inspection. The Department undertakes statutory inspections of banks on the basis of an annual programmed, which is co-terminus with the financial year for public sector banks. After the inspection report is released to the bank, followed by a supervisory letter based on the inspection findings to the bank, the concerns of the inspections are discussed with the CEO of the bank and a Monitor able Action Plan is given to the bank for rectification of those deficiencies. The Department submits a memorandum covering supervisory concerns brought out by the inspection to the Board for Financial Supervision (BFS). Specific corrective directions of the BFS are conveyed to the banks concerned for immediate compliance. The Memoranda submitted by the departments for supervisory scrutiny and consideration of BFS generally cover matters relating to supervisory strategy and operational supervision of individual banks, financial institutions and non-banking financial companies as also industry-wide issues and sectored performance reviews. Closer supervision on the asset quality and fixing responsibility on the board and accountability on top management of banks has had a perceptible impact on the Non Performing Assets (NPAs) of public sector banks. The banks have shown a declining trend in terms of percentage of NPAs to total advances during the last four years. The percentage of gross NPAs to gross advances of public sector banks declined from a high level of 19.45 at the end of March 1995 to 13.86 as on 31 March 2000. The net NPAs formed 8.07% of the net advances.

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On-site inspection

(i) Banks
In terms of the new approach adopted for the on-site inspection of banks, the Inspecting Officers concentrate on core assessments based on the CAMELS model (Capital adequacy, Asset quality, Management, Earnings appraisal, Liquidity and Systems controls. This approach eschews aspects which do not have a direct bearing on the evaluation of the bank as a whole or which should essentially concern the internal management of the bank. The new approach to Annual Financial Inspections was put in practice from the cycle of inspections commencing in July 1997. A rating system for domestic and foreign banks based on the international CAMELS model combining financial management and systems and control elements was introduced for the inspection cycle commencing from July 1998. The review of the supervisory rating system has been completed so as to make it more consistent as a measure of evaluation of banks standing and performance as per on-site review. The improved rating framework is expected to come into effect from the on-site inspection cycle commencing from April 2001. A model to rate the level of customer service in banks was developed and forwarded to Indian Banks Association for conducting appropriate surveys on customer satisfaction at periodical intervals. During the course of annual financial inspections customer audit is carried out to evaluate quality of customer service at branches of commercial banks A Quarterly Monitoring System through on-site visits to the newly licensed banks in their first5 year of operation has been put in place. Old and new private banks displaying systemic weaknesses are also subjected to quarterly monitoring.
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In deference to the desire of the banks (as put forth during an informal feedback session with the Governor in October 1999) to have an opportunity to meet the supervisor at regular intervals for discussing compliance related issues and agreeing on regulatory and supervisory requirements in respect of new business initiatives, a quarterly informal meeting system for banks with the officials of Department of Banking Supervision has been designed and put in operation from January 2000. Some of the public sector banks have also been placed under special monitoring, with a senior Officer in the jurisdictional Regional Office of the Bank entrusted with the special monitoring efforts. The Deputy Governor / Executive Director incharge of banking supervision call the CEOs of those banks, wherein serious deficiencies have been reported in the inspection reports, for a discussion on the specific steps the banks top management would need to take to improve its financial strength and operational soundness. A new Inspection Manual has been brought out in 1998 taking into account evolving supervisory needs and shift in approach towards risk based supervision. Another new manual for the use of inspectors looking at ALM and Treasury operations was prepared with the help of international consultants under the Technical Assistance Project funded by Department for International Development (DFID), UK and has been put to use by the RBI inspectors. Specialized training modules along with extensive guidelines for use of RBI Inspectors are in place for inspection of computerized bank systems. An international consultancy firm, funded by the DFID (UK), helped the Bank in its aforesaid project. In order to address the issue of causes of divergence observed with regard to asset classification etc., provisioning required to be made between the banks/auditors and RBI Inspectors, a representative group of banks, a chartered accountant and RBI officials was constituted in March 2000 to review and arrive at uniform parameters of assessment of NPAs by
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banks/auditors and RBI Inspectors. Guidelines are being issued to the banks and the Inspecting Officers based on the recommendations of the Group.

(ii) Supervision of overseas branches of Indian banks

While inspection of the overseas operations of branches of Indian banks is left largely to the parent banks, a system of evaluation visits covering all branches functioning at different financial centers has been instituted as a part of the initiatives taken to strengthen cross border supervision. Besides periodical visits and meetings with overseas supervisors, formal MOUs for exchange of supervisory information are being worked out as part of the process of implementation of Basel Committees core principles on cross border supervisory cooperation. Portfolio appraisals of the International Divisions of Indian banks having foreign branches are also conducted by the Department of Banking Supervision annually. In these appraisal exercises conducted at the banks corporate offices and controlling divisions of foreign operations, asset quality, operating results, etc. of the foreign branches and the host country regulators perceptions are also assessed and periodically discussed with the banks International Divisions for rectification of the functional gap

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Off-site Monitoring & Surveillance System

(i) Banks
As a part of the new supervisory strategy, an off-site monitoring system for surveillance over banks was put in place in RBI in March 1996. The first tranche of OSMOS returns require quarterly reporting on assets, liabilities and off balance-sheet exposures, CRAR, operating results for the quarter, asset quality and large credit exposures in respect of domestic operations by all banks in India. Data on connected and related lending and profile of ownership, control and management are also obtained in respect of Indian banks. Bank profiles containing bank-wide database on all important aspects of bank functioning including global operations were obtained for the years commencing from 1994 and are being updated annually on an on-going basis. The database provides information on managerial and staff productivity areas besides furnishing important ratios on certain financial growth and supervisory aspects of the banks functioning. Analysis of financial and managerial aspects under the reporting system is done on quarterly basis in a computerized environment in respect of banks and reviews are placed before BFS for its perusal and further directions. The second tranche of returns covering liquidity and interest rate risk exposures were introduced in June 1999. To accommodate the increased data and analysis required by the second tranche of returns, a project to upgrade the OSMOS database has been completed and the new processing system has been put in place for the Returns commencing from the quarter ended September 2000. Trend analysis reports based on certain important macro level growth/performance indicators are placed before BFS at periodical intervals. Some of the important reports generated by the Department include half-yearly review of the performance of banks, half-yearly key banking statistics, analysis of impaired credits, analysis of
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large credits, analysis of call money borrowings, analysis of non SLR investments, etc. The Bank also provides details of peer group performance under various parameters of growth and operations for the banks of a comparative business size to motivate them to do self assessment and strive for excellence. The Indian banks conducting overseas operations report the assets and liabilities, problem credits, maturity mismatches, large exposures, currency position on quarterly basis and country exposure, operating results etc. on an annual basis. The reporting system has been reviewed and rationalized in 1999 in consultation with the banks and the revised system put in place in June 2000. The revised off-site returns focus on information relating to quality and performance of overseas investment and credit portfolio, implementation of risk management processes, earning trends, and viability of the branches.

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Core Principles for Effective Banking Supervision

The Bank has continued with the post-liberalization strategy of setting prudential norms based on international best practices within which banks are left free to operate. The compliance of the Bank with the Basel Committees Core Principles on Banking Supervision was gone into in great detail and the gaps in supervision were addressed by setting up seven in-house groups to make16 necessary recommendations. The reports of these groups were discussed by the BFS in a specially convened session and the agenda set for action to be taken to bridge the gaps. Since then, the compliance is being monitored on a regular basis. The BFS also authorized the release in the public domain of the assessment of compliance, and this document is being shared with overseas supervisory agencies and international financial institutions. The IMF also completed an assessment using the revised methodology of the Core Principles which was in line with the Bank's own assessment. RBIs efforts in this area have been well recognized in international forums and in August 1999, it was made a Member of the Core Principles Liaison Group (CPLG) of the Basel Committee for Banking Supervision, this has been set up to promote the implementation of the Core Principles world-wide. RBI has also examined the proposed New Capital Adequacy Framework currently under discussion by the BCBS, and has communicated its response to the Basel Committee. RBI is also represented on the Working Group of Capital of the Core Principles

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Future Agenda
Consultative Process: One of the major changes brought about in the supervisory functioning is to introduce a consultative process with banks preceding the introduction of major measures. The guidelines on AssetLiability Management (ALM) and on comprehensive Risk Management Systems have been finalized in 1999 on the basis of feedback received from banks and the banks advised to implement the guidelines. The supervisory focus in the coming years will be to monitor the progress of implementation of these systems and to ensure their full coverage. Consultative process has also been followed while introducing the guidelines for investment in non-SLR securities and review of reporting system covering overseas branches of Indian banks. Risk-Based Supervision: A risk based supervisory regime as a means of more efficient allocation of supervisory resources is also being considered. The risk based supervision project, which is being guided by international consultants with the assistance of Department for International Development (UK) would lead to prioritization of selection and determining of frequency and length of supervisory cycle, targeted appraisals, and allocation of supervisory resources in accordance with the risk perception of the supervised institutions. The Risk Based Approach will also facilitate the implementation of the supervisory review pillar of the proposed New Capital Accord, which requires that national supervisors set capital ratios for banks based on their risk profile. Prompt Corrective Action: To guard against regulatory forbearance and to ensure that regulatory intervention is consistent across institutions and is in keeping with the extent of the problem, a framework for Prompt Corrective Action has been developed. The PCA framework, which will link regulatory action to quantitative measures of performance, compliance and solvency
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such as CRAR, NPA levels and profitability, has been circulated for discussion and suggestions to a wider audience of banks and interested public, and would now be considered by the BFS before being implemented Consolidated Supervision: An approach of consolidated supervision that, while leaving the responsibility of supervision of bank subsidiaries to their respective regulators, will allow bank supervisors to obtain a consolidated view of the operations of bank groups has been approved. This will also require greater coordination between the different supervisors in the financial sector. Quarterly reporting by parent banks on key areas of functioning of subsidiaries has been introduced from the quarter ending September 2000. The banks are now being required to annex the financial statements of their subsidiaries along with their annual accounts. A Working Group has been set up to look into the introduction of consolidated accounting and it would submit its report by May 2001. Thus, the components of this diversified approach are being gradually put in place. Upgrading Reporting Systems: With the increasing reliance upon offsite reporting as an instrument of supervision, up gradation of systems has been a focus area of the BFS and this focus will continue in the future. The project under way to move the surveillance database to RDBMS with a data-warehousing component will provide line supervisors the ability to closely monitor banks and detect vulnerabilities in the system at an incipient stage. Skills Up gradation: The skill-set required by supervisors has changed radically over the past few years. With the introduction of technology and new products and the move towards risk based supervision, the demands on supervision have also increased. Thus, meeting the training needs of supervisors in this changing environment will be a priority area and will be monitored continuously. In the coming years, the RBI will continue to guide the development of supervisory prescriptions and practices along the lines of international best practices based on global standards so as to strengthen both the supervisory regime as well as the Indian banking system.

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Banks Supervision is done by Regulatory Authorities

Reserve Bank of India (RBI)

Securities Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDA)

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Reserve Bank of India

Headquarters Established Governor Central bank of Currency ISO4217 Code Reserves Base borrowing rate Base deposit rate Website

Mumbai, Maharashtra 1 April 1935 Duvvuri Subbarao India Indian Rupee INR US$300.21 billion (2010) 8.25% 6.00% rbi.org.in

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Introduction
The Reserve Bank of India (RBI) (Hindi: ) is the banking institution of India and controls the monetary policy of the rupee as well asUS$300.21 billion (2010)[1] of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. [2]Reserve Bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks

Structure Central Board of Directors

The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, four directors to represent the regional boards, and ten other directors from various fields.
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Core Functions

The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks and select FIs in the following forms: a. Undertaking scheduled and special on-site inspections of banks, their offsite surveillance as also post inspection follow-up of compliance. b. Serving as the secretariat for the Board for Financial Supervision (BFS). c. Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards. d. Dealing with financial sector frauds and attending to the complaints received against the banks and FIs from public, banks, Government, etc. e. Exercising supervisory intervention in the implementation of regulations which includes - recommendation for removal of managerial and other persons, suspension of business, amalgamation, merger/winding up, issuance of directives and imposition of penalties. In 2004, the work relating to inspection of Authorised Dealers has also been transferred from the Foreign Exchange Department to this Department.

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Main functions
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries.[6] The RBI faces a lot of intersectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[28]

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Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s. The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins

Manager of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India

Minimum Reserve System - Principle of Currency Note Issue

RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'.
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Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.

Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[29] The institution maintains banking accounts of all scheduled banks, too. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.

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Policy rates and Reserve ratios

Policy rates, Reserve ratios, lending, and deposit rates as of 14 September, 2011

Bank Rate Repo Rate

6.0% 8.25%

Reverse Repo Rate Cash Reserve Ratio (CRR)

7.25% 6.0%

Statutory Liquidity Ratio (SLR) Base Rate

24.0% 9.50%10.75%

Reserve Bank Rate Deposit Rate

4% 8.50%9.50%

Bank Rate:
RBI lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%.
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Cash Reserve Ratio (CRR):

Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%.

Statutory Liquidity Ratio (SLR):

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. In well-developed economies, central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.

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Generally RBI uses three kinds of selective credit controls:

1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatorily required to keep 24% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

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Core Principles of Effective Banking Supervision

Reserve Bank of India

Section I. Preconditions for Effective Banking Supervision

Section II. Licensing and Structure

Section III. Prudential Regulations and Requirements

Section IV. Methods of Ongoing Banking Supervision

Section V. Information Requirements

Section VI. Formal Powers of Supervisors

Section VII. Cross-border Banking

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Bankers to Bank
Banks are required to maintain a portion of their demand and time liabilities as cash reserves with the Reserve Bank, thus necessitating a need for maintaining accounts with the Bank. Further, banks are in the business of accepting deposits and giving loans. Since different persons deal with different banks, in order to settle transactions between various customers maintaining accounts with different banks, these banks have to settle transactions among each other. Settlement of inter-bank obligations thus assumes importance. To facilitate smooth operation of this function of banks, an arrangement has to be made to transfer money from one bank to another. This is usually done through the mechanism of a clearing house where banks present cheques and other such instruments for clearing. Many banks also engage in other financial activities, such as, buying and selling securities and foreign currencies. Here too, they need to exchange funds between themselves. In order to facilitate a smooth inter-bank transfer of funds, or to make payments and to receive funds on their behalf, banks need a common banker. In order to meet the above objectives, in India, the Reserve Bank provides banks with the facility of opening accounts with itself. This is the Banker to Banks function of the Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) at the Regional offices. The Department of Government and Bank Accounts oversees this function and formulates policy and issues operational instructions to DAD. To fulfill this function, the Reserve Bank opens current accounts of banks with itself, enabling these banks to maintain cash reserves as well as to carry out inter-bank transactions through these accounts. Inter-bank accounts can also be settled by transfer of money through electronic fund transfer system, such as, the Real Time Gross Settlement System (RTGS). The Reserve Bank continuously monitors operations of these accounts to ensure that defaults do not take place. Among other provisions, the Reserve Bank stipulates minimum balances to be maintained by banks in these accounts. Since banks need to settle funds with each other at various places in India, they are allowed to open accounts with different regional offices of the Reserve Bank. The Reserve Bank also facilitates remittance of funds from a banks surplus account at one location to its deficit account at another.

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Such transfers are electronically routed through a computerized system. The computerization of accounts at the Reserve Bank has greatly facilitated banks monitoring of their funds position in various accounts across different locations on a real-time basis. Enabling smooth, swift and seamless clearing and settlement of inter-bank obligations. Providing an efficient means of funds transfer for banks. Enabling banks to maintain their accounts with the Reserve Bank for statutory reserve requirements and maintenance of transaction balances.

As Banker to Banks, the Reserve Bank focuses on:

In addition, the Reserve Bank has also introduced the Centralized Funds Management System (CFMS) to facilitate centralised funds enquiry and transfer of funds across DADs. This helps banks in their fund management as they can access information on their balances maintained across different DADs from a single location. Currently, 75 banks are using the system and all DADs are connected to the system. As Banker to Banks, the Reserve Bank provides short-term loans and advances to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes. These loans are provided against promissory notes and other collateral given by the banks. As a Banker to Banks, the Reserve Bank also acts as the lender of last resort. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of a bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.

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Commercial Banks
Licensing
For commencing banking operations in India, whether by an Indian or a foreign bank, a license from the Reserve Bank is required. The opening of new branches by banks and change in the location of existing branches are also regulated as per the Branch Authorization Policy. This policy has recently been liberalized significantly and Indian banks no longer require license from the Reserve Bank for opening a branch at a place with population of below 50,000. The Reserve Bank continues to emphasise opening of branches by banks in unbanked and under-banked areas of the country. The Reserve Bank also regulates merger, amalgamation and winding up of banks.

Corporate Governance
The Reserve Banks policy objective is to ensure high-quality corporate governance in banks. It has issued guidelines stipulating fit and proper criteria for directors of banks. In terms of the guidelines, a majority of the directors of banks are required to have special knowledge or practical experience in various relevant areas. The Reserve Bank also has powers to appoint additional directors on the board of a banking company.

Statutory Pre-emotions
Commercial banks are required to maintain a certain portion of their Net Demand and Time Liabilities (NDTL) in the form of cash with the Reserve Bank, called Cash Reserve Ratio (CRR) and in the form of investment in unencumbered approved securities, called Statutory Liquidity Ratio (SLR). The Reserve Bank also monitors compliance with these requirements by banks in their day-to-day operations.

Interest Rate
The interest rates on most of the categories of deposits and lending transactions have been deregulated and are largely determined by banks. However, the Reserve Bank regulates the interest rates on savings bank accounts and deposits of non-resident Indians (NRI), small loans up to rupees two lakh, export credits and a few other categories of advances.
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Risk Management
Banks, in their daily business, face various kinds of risks. The Reserve Bank requires banks to have effective risk management systems to cover credit risk, market risk, operational risk and other risks. It has issued guidelines, based on the Basel II capital adequacy framework, on how to measure these risks as well as how to manage them

Protection of Small Depositors

The Reserve Bank has set up Deposit Insurance and Credit Guarantee Corporation (DICGC) to protect the interest of small depositors, in case of bank failure. The DICGC provides insurance cover to all eligible bank depositors up to Rs.1 lakh per depositor per bank.

Para - banking Activities

The banking sector reforms and the gradual deregulation of the sector inspired many banks to undertake non-traditional banking activities, also known as para-banking. The Reserve Bank has permitted banks to undertake diversified activities, such as, asset management, mutual funds business, insurance business, merchant banking activities, factoring services, venture capital, card business, equity participation in venture funds and leasing.

Periodic Meetings
The Reserve Bank periodically meets the top management of banks to discuss the findings of its inspections. In addition, it also has quarterly / monthly discussions with them on important aspects based on OSMOS returns and other inputs.

Monitoring of Frauds
The Reserve Bank regularly sensitizes banks about common fraudprone areas, the modus operandi and the measures necessary to prevent frauds. It also cautions banks about unscrupulous borrowers who have perpetrated frauds with other banks.

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Foreign Banks
In February 2005, the Government of India and the Reserve Bank released the Roadmap for presence of Foreign Banks in India laying out a two-track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India. One track was the consolidation of the domestic banking system, both in private and public sectors, and the second track was the gradual enhancement of the presence of foreign banks in a synchronized manner. The roadmap was divided into two phases, the first phase spanning the period March 2005 - March 2009, and the second phase beginning April 2009 after a review of the experience gained in the first phase. In view of the recent global financial market turmoil, there are uncertainties surrounding the financial strength of banks around the world. Further, the regulatory and supervisory policies at national and international levels are under review. In view of this, the current policy and procedures governing the presence of foreign banks in India will continue. The proposed review will be taken up after consultation with the stakeholders once there is greater clarity regarding stability, recovery of the global financial system and a shared understanding on the regulatory and supervisory architecture around the world.

Supervisory Strategy

The Department of Banking Supervision has formulated and put in place a supervisory strategy which, besides retaining the importance of on-site inspections which has been the main plank of banking supervision, also focuses on three other areas:

off-site monitoring through introduction of a set of Returns; Strengthening of the internal control systems in banks and Increased use of external auditors in banking supervision.
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Securities Exchange Board of India

Establishment of SEBI
The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

Preamble
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as

..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto

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Objectives of SEBI
(a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) Regulating the securities market.

Introduction
On April 12, 1988, the Securities and Exchange Board of India (SEBI) was established with a dual objective of protecting the rights of small In 1992, the Bombay Stock Exchange (BSE), the leading stock exchange in India, witnessed the first major scam masterminded b Harshad y Mehta. Analysts unanimously felt that if more powers had been given to SEBI the scam would not have happened. As a result, the Government of India (GoI) brought in a separate legislation by the name of 'SEBI Act 1992' and conferred statutory powers to it. Since then, SEBI had introduced several stock market reforms. These reforms Significantly transformed the face of Indian stock markets. investors and regulating and developing the stock markets in India. SEBI introduced on-line trading and demat of shares which did away with the age-old paper-based trading, thus bringing more transparency into the trading system. Analysts and experts appreciated SEBI for these reforms. One stock market analyst said, "I'm sure that most of us would agree that SEBI has handled the challenges exceptionally well." In spite of SEBI's capital market reforms and increasing regulatory powers over the years, analysts felt that it had failed miserably in stopping stock market scams. In the ten years after the Mehta scam, several scams came to light, casting doubt on the efficiency of SEBI as a regulatory body.
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Activities of SEBI
Rules regarding registration of intermediaries

Guidelines and Code of Conduct for Merchant Bankers Categorisation of Merchant Bankers Guidelines for Portfolio Management Services Ciruclars on various issues (Periodical) Guidelines for Lead-managers Regulation for Registrars and Share-Transfer agents Guidelines for IPOs, Debt. Instruments Regulation on Insider trading Guidelines for Mutual funds Regulation on take overs Code for Corporate Governance Consultative Paper on free market pricing of Capital Issues. Advisory committees for Primary and Secondary Market Reviews Investor Protection guidelines Guidelines on SROs for Merchant Bankers Regulation of Futures and Options, Index Market Informal Guidance

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Major SEBI Guidelines for banks

In order to attain the objectives, SEBI has issued Guidelines, Rules and Regulations from time to time. The most important of these is the SEBI (Disclosure and Investor Protection) Guidelines, 2010". The provisions of these Guidelines,2000 are aimed to protect the interest of the investors in securities.

The Guidelines, 2010 deals with the following areas :

Eligibility norms for companies issuing securities, Pricing of securities by companies, Promoters contribution and lock-in requirements, Pre-issue obligations of the merchant bankers, Contents of the prospectus/abridged prospectus letter of offer, Post issue obligation, of merchant bankers, Green shoe option, Guidelines on advertisements, Guidelines for issue of debt instruments, Guidelines for book building process Guidelines on public offer through stock exchange on-Iine system, Guidelines for issue of capital by financial institutions, Guidelines for preferential issues of securities, Guidelines for bonus issues, Other operational and miscellaneous matters.

In order to regulate and control and to provide a code of conduct for the merchant bankers, other participants of capital market, and other matters relating to trading of securities, SEBI has issued several Rules and Regulations. These are related to Bankers to the issues, Buy back of securities, Collective Investments Schemes, Delisting of securities, Depositors, Derivatives, Employee stock options, Foreign Institutional Investors(FIIs), Insider Trading, Lead Manager, Market Makers, Merchant Bankers, Mutual Funds, Ombudsman, Portfolio Manager, Registrars and Share Transfer Agents, Securities Lending Scheme, Sweat Equity, Stock Brokers and sub-brokers, Takeover Regulations, Transfer of Shares,

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Guidelines for Mutual Funds in Banks

The Securities and Exchange Board of India (SEBI) has brought in sweeping changes for the mutual fund industry. The impact of which will be felt on the investor in more ways than one.

1) First, for New Fund Offers (NFOs): They will only be open for 15 days. (ELSS funds though will continue to stay open for up to 90 days) It will save investors from a prolonged NFO period and being harangued by advisors and advertisements. The motivation behind the rule seems to be simple if you can invest anytime, why keep NFO period long? 2) NFOs can only be invested at the close of the NFO period. Earlier, Mutual funds would keep an NFO open for 30 days, and the minute they received their first cheque, the money would be directly invested in the market; creating a skewed accounting for those that entered later since they get a fixed NFO price. The market regulator has corrected this by extending Application Supported by Blocked Amount (ASBA) to mutual funds. This will become effective starting July 1 st this year. By the ASBA process (Application Supported by Blocked Amount) one can continue to earn interest in the bank account until the NFO closes (remember there is usually no rejection or oversubscription in a mutual fund NFO) which means that the cheque goes for clearing after the NFO has closed irrespective of when it was sent. The fund manager will be able to invest once the NFO closes.

3) Dividends can now only be paid out of actually realized gains. Impact: it will reduce both the quantum of dividends announced, and the measures used by MFs to garner investor money using dividend as a carrot to entice new investors.
4) Equity Mutual funds have been asked to play a more active role in corporate governance of the companies they invest in. This will help mutual funds become more active and not just that, they must reveal, in their annual reports from next year, what they did in each vote. SEBI has now
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made it mandatory for funds to disclose whether they voted for or against moves (suggested by companies in which they have invested) such as mergers, demergers, corporate governance issues, appointment and removal of directors. MFs have to disclose it on their website as well as annual reports. 5) Equity Funds were allowed to charge 1% more as management fees if the funds were no-load; but since SEBI has banned entry loads, this extra 1 % has also been removed. 6) SEBI has also asked Mutual Funds to reveal all commission paid to its sponsor or associate companies, employees and their relatives.

7) Regarding the Fund-of-Fund (FOF) The market regulator has stated that information documents that Asset Management Companies (AMCs) have been entering into revenue sharing arrangements with offshore funds in respect of investments made on behalf of Fund of Fund schemes create conflict of interest. Henceforth, AMCs shall not enter into any revenue sharing arrangement with the underlying funds in any manner and shall not receive any revenue by whatever means/head from the underlying fund.
These guidelines set by the SEBI will lead to greater transparency for the common investor. SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. With these guidelines falling in place it would create better trust and transparency and an investable environment that would attract investors with greater faith and confidence. A welcome &refreshing move!

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SEBI Guidelines for Merchant Banks

1. IPOs of small companies
Public issue of less than five crores has to be through OTCEI and separate guidelines apply for floating and listing of these issues.

2. Size of the Public Issue

Issue of shares to general public cannot be less than 25% of the total issue, incase of information technology, media and telecommunication sectors this stipulation is reduced subject to the conditions that:

Offer to the public is not less than 10% of the securities issued. A minimum number of 20 lakh securities is offered to the public and Size of the net offer to the public is not less than Rs. 30 crores.

3. Promoter Contribution

Promoters should bring in their contribution including premium fully before the issue Minimum Promoters contribution is 20-25% of the public issue. Minimum Lock in period for promoters contribution is five years Minimum lock in period for firm allotments is three years.

4. Collection centers for receiving applications

There should be at least 30 mandatory collection centers, which should include invariably the places where stock exchanges have been established. For issues not exceeding Rs.10 crores (including premium, if any), the collection centres shall be situated at the four metropolitan centres viz. Bombay, Delhi, Calcutta, Madras; and at all such centres where stock exchanges are located in the region in which the registered office of the company is situated.

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5. Regarding allotment of shares

Net Offer to the General Public has to be at least 25% of the Total Issue Size for listing on a Stock exchange. It is mandatory for a company to get its shares listed at the regional stock exchange where the registered office of the issuer is located. In an Issue of more than Rs. 25 crores the issuer is allowed to place the whole issue by book-building Minimum of 50% of the Net offer to the Public has to be reserved for Investors applying for less than 1000 shares. There should be atleast 5 investors for every 1 lakh of equity offered (not applicable to infrastructure companies). Quoting of Permanent Account Number or GIR No. in application for allotment of securities is compulsory where monetary value of Investment is Rs.50,000/- or above. Indian development financial institutions and Mutual Fund can be allotted securities upto 75% of the Issue Amount. A Venture Capital Fund shall not be entitled to get its securities listed on any stock exchange till the expiry of 3 years from the date of issuance of securities. Allotment to categories of FIIs and NRIs/OCBs is upto a maximum of 24%, which can be further extended to 30% by an application to the RBI - supported by a resolution passed in the General Meeting.

6. Timeframes for the Issue and Post- Issue formalities

The minimum period for which a public issue has to be kept open is 3 working days and the maximum for which it can be kept open is 10 working days. The minimum period for a rights issue is 15 working days and the maximum is 60 working days. A public issue is affected if the issue is able to procure 90% of the Total issue size within 60 days from the date of earliest closure of the Public Issue. In case of over-subscription the company may have the right to retain the excess application money and allot shares more than the proposed issue, which is referred to as the green-shoe option. A rights issue has to procure 90% subscription in 60 days of the opening of the issue. Allotment has to be made within 30 days of the closure of the Public Issue and 42 days in case of a Rights issue.
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7. Dispatch of Refund Orders

Refund orders have to be dispatched within 30 days of the closure of the Public Issue. Refunds of excess application money i.e. for un-allotted shares have to be made within 30 days of the closure of the Public Issue.

8. Other regulations pertaining to IPO

Underwriting is not mandatory but 90% subscription is mandatory for each issue of capital to public unless it is disinvestment in which case it is not applicable. If the issue is undersubscribed then the collected amount should be returned back (not valid for disinvestment issues). If the issue size is more than Rs. 500 crores voluntary disclosures should be made regarding the deployment of the funds and an adequate monitoring mechanism to be put in place to ensure compliance. There should not be any outstanding warrants or financial instruments of any other nature, at the time of initial public offer. In the event of the initial public offer being at a premium, and if the rights under warrants or other instruments have been exercised within the twelve months prior to such offer, the resultant shares will not be taken into account for reckoning the minimum promoter's contribution and further, the same will also be subject to lock-in. Code of advertisement specified by SEBI should be adhered to. Draft prospectus submitted to SEBI should also be submitted simultaneously to all stock exchanges where it is proposed to be listed.

9. Restrictions on other allotments

Firm allotments to mutual funds, FIIs and employees not subject to any lock-in period. Within twelve months of the public/rights issue no bonus issue should be made. Maximum percentage of shares, which can be distributed to employees, cannot be more than 5% and maximum shares to be allotted to each employee cannot be more than 200.

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Insurance Regulatory and Development Authority

Establishment of IRDA:
Life Insurance in India was nationalized by incorporating Life Insurance Corporation (LIC) in 1956.All private life insurance companies at that time were taken over by LIC.In 1993 the Government of Republic of India appointed R N Malhotra Committee to lay down abroad map for privatization of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000.The same year that the newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA-- started issuing licenses to private life insurers. The Insurance sector in India has gone through a number of phases and changes, particularly in the recent years when the Govt. of India in 1999 opened up the insurance sector by allowing private companies to solicit insurance and also allowing FDI up to 26%.Life and general insurance in India is still a nascent sector with huge potential for various global players with the life insurance premiums accounting to 2.5% of the country's GDP while general insurance premiums to 0.65% of India's GDP
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Introduction
The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. The Insurance Regulatory and Development Authority IRDA were constituted as an autonomous body to regulate and develop the business of insurance and re-insurance in India. The Authority was constituted on April 19, 2000. The Insurance Regulatory and Development Authority Act, 1999, were enacted by Parliament. IRDA was set up in 1996 but it was formally constituted as a regulator of the insurance industry in April 2000 Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." ..The objectives of IRDA are policyholder protection and healthy growth of the insurance market. IRDA has constituted the Insurance Advisory Committee and in consultation with the committee has brought out seventeen regulations. A leading consumer activist has also been inducted into the Insurance Advisory Committee. In addition, representatives of consumers, industry, insurance agents, womens organizations, and other interest groups are a part of this committee. In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator Securities and Exchange Board of India.

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Expectations
The law of India has following expectations from IRDA...

1. To protect the interest of and secure fair treatment to policyholders. 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates. 4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. 5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery. 6. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players. 7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation.

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Insurance Regulatory and Development Authority Act

The passage of Insurance Regulatory and Development Authority Act in 1999 can be seen a dividing line for insurance business in India. It was an outcome of the implementation of the recommendations of a high powered committee, which suggested the setting up of a statutory body called the Insurance Regulatory Authority in 1996. This body was later renamed as Insurance regulatory and Development Authority with the passage of IRDA Act by the parliament.

Insurance Act
The passage of the Insurance Act, 1938 and its subsequent amendments in 1950 and 1999 are serious attempts to bring order in the business ofinsurance in India. The Act attempted to address various issues relating to the business. Some of them are:

Protection of policy holder interest Limiting the expenses of insurance organizations Establishment of tariff advisory committee Solvency levels to be maintained Creation of Insurance organization Defining the roles and responsibilities of various functionaries associated with the business

Objectives of IRDA Act

To protect the investor's interest To promote orderly growth of insurance industry in the country, including registration of insurance companies To administer the provisions of Insurance Acts To devise control activities needed for smooth functioning of the insurance companies including investment of funds and solvency requirements to be maintained by insurance companies. To lay down the accounting methodology to be adopted To adjudicate on disputes
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Functions of IRDA
As defined by the IRDA Act, 1999, the broad functions of IRDA are as follows:

Ensure orderly growth of the Insurance industry Protection of policyholder's interest Issue consumer protection guidelines to insurance companies Grant, modify, and suspend license for insurance companies Lay down procedure for accounting policies to be adopted by the insurance companies Inspect and audit of insurance companies and other related agencies Regulation of capital adequacy, solvency, and prudential requirements of insurance business Regulation of product development and their pricing including free pricing of products Promote and regulate Self Regulating organizations in the insurance industry Re-insurance limit monitoring Monitor investments Vetting of accounting standards, transparency requirements in reporting Ensure the health of the industry by preventing sickness through appropriate action Publish information about the industry Prescribe qualification and training needs of agents Monitor the charges for various services provided by insurance companies

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Duties and Powers of IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA

1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and reinsurance business

2. Without prejudice to the generality of the provisions contained in subsection (1), the powers and functions of the Authority shall include, Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;

Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; Specifying the code of conduct for surveyors and loss assessors;

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 Promoting efficiency in the conduct of insurance business; Promoting and regulating professional organizations connected with the insurance and re-insurance business;

Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);

Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; Regulating investment of funds by insurance companies;

Regulating maintenance of margin of solvency; Adjudication of disputes between insurers and intermediaries or insurance intermediaries;

Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f);
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IPO guidelines for Banks carrying Insurance: IRDA

Insurance sector regulator IRDA today said it is likely to come out with initial public offer (IPO) guidelines by October. "We had two meetings with the SEBI and couple of more is required (to decide on final guideline on IPO)," IRDA Chairman J Hari Narayan said at a CII event."If I take optimistic frame probably by October, he said, when asked by when guidelines would be finalized. There are 22 life insurance firms and 21 non-life insurance companies operating in the country currently. To facilitate fair valuation of an insurance firm, the regulator is likely to come out with guidelines over the next 15 days. "Guidance note on valuation has to come from the Institute of Actuaries and this is likely to come in the next 10-15 days." These will standardize the norms for calculation of embedded value of the companies, he said, adding, once the institute comes out with guidance note then insurance companies have to follow. IRDA is also working on disclosure norms for insurance companies that will work in the larger interest of the public, he said. Asked whether disclosure norms would come before IPO guidelines, he replied saying "that should seem very logical way of doing it."

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 He said, "There are two things, one is disclosure for IPO what is called draft red herring prospectus and the other is the disclosure on the systematic basis by listed companies for example their balance sheet details, quarterly or semiannual disclosure." Expressing concern over rising claims in the health insurance segment Hari Narayan said, "One thing very striking for the insurance system which we see in India is that the (health) insurance portfolio has got negative claim ratio of 110 per cent." For the individual health products the claims ratio is around 80-90 per cent whereas for the group it is 120 per cent, he said. So obviously, he said, group policy management is not as effective as individual policy management. Noting that the growth of group policy is close to 60 per cent, he said when every other line is loosing their business in terms of growth, the rising number of group insurance is not a healthy trend. Recognizing the importance of engagement with multiple stakeholders in finding solutions to various challenges, he said, there is need to ensure accessibility, affordability and efficiency in the health insurance system of the country. It requires sustained and focused efforts on the part of all stockholders in the health insurance eco-system, he said.

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Conclusion
Allowing a bank to fail is the tragedy that a supervisor should try to avoid. In order to ensure that banks are not allowed to fail, it is essential that corrective actions must be taken when banks have adequate cushion of capital and their financial position is still satisfactory. This is important since low or negative capital base and adverse financial conditions will induce banks to try desperate measures such as, offering very high interest rates on deposits to fund high risk borrowers. The Basel Committee had also endorsed the need for supervisors taking timely corrective action when banks fail to meet CRAR or other prudential requirements. It is accepted that intervention should be guided by rules rather than left to the discretion of supervisors. The best known example of rule-based structured early intervention is the compulsory quantitative triggers for action by FDIC. Similar rules have been adopted in some developed economies and in a number of emerging market economies. While CRAR is generally accepted as a trigger point, a few emerging market economies have adopted multiple trigger points, viz. illiquidity, insolvency, serious violation of laws and regulations, noncompliance with prudential standards, etc. The rule-based framework in most of the countries focuses on the need to prevent insolvency of banks. It is, however, considered desirable to build a broader PCA regime in India so as to delineate rule-based actions not only for shortfall in capital but also for other indicators of deficiency so that a seamless paradigm for corrective actions can be put in place for major deficiencies in banks functioning. Accordingly, a schedule of corrective actions has been worked out based on three parameters. It is suggested to incorporate a blend of mandatory and discretionary prompt actions for every trigger point to deal comprehensively with different dimensions of problems. However, in exceptional cases, RBI will have right to waive mandatory provisions. While the published balance sheets, off-site returns and on-site inspection reports are the primary sources for identifying banks to be placed under PCA framework, the discretion to enforce PCA will be vested with BFS.
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BIBLIOGRAPHY
BOOKS
AUDIT P. K. Bandgar

WEBSITES VISITED
www.rbi.org.in/home.aspx

www.rbi.org.in/Scripts/PublicationReportDetails.aspx?FromDate=09/2 6/00&SECID=4&SUBSECID=9

http://www.google.co.in/#sclient=psyab&hl=en&source=hp&q=role%20of%20regulatory%20authorities&pb x=1&oq=role%20of%20regulatory%20au&aq=1

www.finance.indiamart.com/india_business_information/sebi.html

www.inance.indiamart.com/india_business_information/sebi_introduc tion.html

www.sebi.gov.in/faq/faqpms.html

www.irdaindia.org/rti_act2005.htm

www.irdaindia.org/hist.htm
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