As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs).
As part of these functions, it
• Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.
• Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis
• Undertakes portfolio inspections, systems study, besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs)
• Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs)
• Administering Credit Monitoring Arrangements (CMA) in SCBs and CCBs.
NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provisions of Section 35(6) of the Banking Regulation Act (BR Act), 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc., on a voluntary basis.
Objectives of Inspection
• To protect the interest of the present and future depositors
• To ensure that the business conducted by these banks is in conformity with the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc
• To ensure observance of rules, guidelines, etc., formulated and issued by NABARD/RBI/Government
• To examine the financial soundness of the banks
• To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit
Instruments of Supervision
• Periodic on-site inspection of SCBs, DCCBs, SCARDBs and RRBs and other Apex level Cooperative institutions
• Supplementary Appraisal
• Off-site Surveillance System ( OSS )
• Portfolio inspection/System study
• Monitoring through returns including CMA and Frauds
• Attending to complaints in respect of Cooperative Banks (excluding Urban Cooperative Banks) and RRBs
In the wake of the banking sector reforms, new set of international norms/practices were made applicable to Commercial Banks (CBs) to make them more competitive and sustainable in the changing scenario. The co-operative banks and RRBs were also to function in the general banking environment, emerging out of the financial sector reforms, introduced by the GOI/RBI. Accordingly, the prudential norms were extended to them in phases. While the capital adequacy norm has not yet been made applicable to these banks, the other prudential norms viz. income recognition, asset classification and provisioning, which were made applicable by RBI to the commercial banking sector had been extended to cover RRBs in 1995-96, SCBs and DCCBs in 1996-97 and by NABARD to SCARDBs in 1997-98. NABARD, through a concrete and time-bound supervision strategy, facilitate these banks to adjust to the new financial discipline so as to internalize prudential norms stipulated.
Under the revised strategy, a sharper focus of the NABARD’s inspection was given on the core areas of the functioning of banks pertaining to Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems and Compliance (CAMELSC). Thus, NABARD’s focus in its statutory ‘on-site’ inspections is on core assessments leaving the collateral appraisals to banks. The micro level aspects are to be taken care of by the banks themselves by way of internal inspections or by other agencies such as auditors. In this direction, through a series of workshops and meetings held with the Chief Executives and the Chief Auditors of cooperative banks, NABARD has been attempting to ensure that the other areas, particularly relating to the internal checks and controls, revenue and income realization by way of interest on loans and advances, investments and other routine features of carrying out general banking transactions were suitably taken care of by the banks and their concurrent/statutory audit systems.
As a part of the new strategy of supervision, a system of `Off-site Surveillance' has been introduced as a supplementary tool to the on-site inspection. Its objectives are to obtain and analyse critical data on a continuous basis, to identify areas of supervisory concern and to identify early warning signals and risky areas requiring further probe. The system basically envisages desk scrutiny of operations of cooperative banks and RRBs through a set of statutory and non-statutory returns. While the periodical statutory on-site inspections attempt an overall evaluation of the performance of the banks with a stipulated period, off-site surveillance envisages continuous supervision supplementing the on-site inspections with additional instruments of supervision.
Board of Supervision (for SCBs, DCCBs and RRBs)
Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal Committee to the Board of Directors of NABARD.
The broad powers and functions of the Board of Supervision are :
• Giving directions and guidance in respect of policies and on matters relating to supervision and inspection, reviewing the inspection findings, suggesting appropriate measures
• Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of frauds and internal checks and control
• Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc.
• Suggesting necessary follow-up measures
• Recommending appropriate training for Inspecting Officers of NABARD for imparting necessary skills and knowledge
• Suggest measures for strengthening of DoS
• Recommend issue of directions by RBI
• Oversee the quality of inspections carried out and the reports issued
• Review the information generated through off-site surveillance and other supplementary vehicles, action taken thereon
• Undertake any other functions entrusted from time to time by the Board of Directors of NABARD
The Board of Supervision reviews the financial position of Cooperative Banks and RRBs based on the inspections of these banks by NABARD. Based on the observations of BoS, authorities concerned are apprised of the weaknesses of the banks.
The day-to-day functioning of the supervised banks is being monitored through various statutory returns prescribed by the RBI/NABARD including OSS returns
State level groups comprising RCS, Apex bank, Cooperation and Finance Department, State Government, Director of Audit and non-compliant banks have been constituted/convened for preparing/discussing suitable strategy for banks not complying with the provisions of Section 11(1) of BR Act, 1949 [ as applicable to Cooperative Societies (AACS)] and monitoring the progress of Action Plan prepared by them to facilitate recompliance with the provisions.
Periodic discussions are held with the MD, Apex Banks, RCS, State Government, etc., to discuss the supervisory concerns.
RO set up
Suitable and adequate officers are placed in DoS units at RO level to undertake inspection of banks, issue inspection reports and take other follow up measures including review, monitoring of compliance, OSS, etc., in conformity with DoS, HO guidelines.