Usha Thorat: Urban cooperative banks - evolution of the banks, current issues
in corporate governance and challenges in their regulation and supervision
Text of the Late Shri R N Godbole Memorial Lecture (2006), delivered by Ms Usha Thorat, Deputy
Governor of the Reserve Bank of India, at Shivaji University, Kolhapur, 6 December 2006.
* * *
Ladies and Gentlemen,
I am happy and honoured to be here today to deliver the "Late Shri. R. N. Godbole memorial lecture"
this year. My thanks to the Shivaji University, Kolhapur for extending me the invitation to deliver this
lecture.
I have chosen to speak today on Urban Cooperative Banks - a key sector in the Indian Banking scene,
which in the recent years has gone through a lot of turmoil. While the ordeal is not as yet over for
some banks, the sector on the whole is showing signs of looking up. It is encouraging to note that the
Reserve Bank's initiatives towards the revival of this sector - a unique sector blending banking and
cooperation - are bearing fruit. Talking of cooperation, one cannot but recollect the glory of this
wonderful district that we are in today - Kolhapur, a leading district in the cooperative movement in
Maharashtra, famous for its cooperatives.
Indeed, it is a good time and place to have a detailed discussion on the evolution of the UCBs,
governance issues observed in them and the challenges in the regulation and supervision of the
sector.
I would like to begin with a brief note on the historical perspective on cooperative movement in India
and the origin of UCBs, and then move on to the current issues.
Historical perspective
The cooperative movement in India started a century ago with the enactment of Cooperative Societies
Act in 1904. Interestingly, legal status was conferred on credit societies keeping in view, in particular,
the needs of the agricultural sector. Nevertheless, Sir Ibbetson, who piloted the legislation observed:
"We recognize that artisans, employees on small pay and other persons in towns may very properly
be admitted to the benefits of our legislation".
Although joint stock banks opened branches in urban and semi-urban areas, they did not find it
advantageous to cater to the banking and credit requirements of the urban middle/lower class
comprising small traders/ businessmen, artisans, factory workers, salaried persons with limited
incomes etc. The inability of joint stock banks to appreciate and cater to the needs of this class of
clientele with limited means effectively drove them to money-lenders and similar agencies for loans at
exorbitant rates of interest - this situation was the prime mover for non-agricultural credit cooperatives
coming into being in India. The main objectives of such cooperatives were to meet the banking and
credit requirements of this section of people and to protect them from exploitation. Thus, urban
cooperative banks' emergence was a result of local response to an enabling legislative environment,
unlike rural cooperative movement that was largely State-driven. The origin of cooperative banks can
be traced to a small town in South India, called Conjivaram, where in 1904, the Conjivaram Urban
Cooperative Bank was set up, to cater to the needs of small businessmen as an alternative to
moneylenders.
Little attention had been paid to the development of the urban credit movement until the Maclagan
Committee (1914) drew attention to its potentials. Interestingly, a banking crisis in India in 1913-14,
when no fewer than 57 joint stock banks collapsed, led to a flight of deposits from joint stock banks to
urban cooperative banks. The Maclagan Committee investigating the crisis stated 'As a matter of fact,
the crisis had a contrary effect and in most provinces there was a movement to withdraw deposits from
non cooperatives and place them in cooperative institutions, the distinction between the two classes of
security being well appreciated and preference being given to latter owing partly to the local character
and publicity of cooperative institutions but mainly we think, to the connection of Government with the
cooperative movement'.
Urban Cooperative Banks (UCBs)
Urban cooperative banks, also referred to as primary co-operative banks, play an important role in
meeting the growing credit needs of urban and semi-urban areas of the country. They mobilise
savings from the middle and lower income groups and purvey credit to small borrowers, including
weaker sections of the society. These banks in India are financial cooperatives akin to credit unions
found abroad, except that they can also accept deposits from non-members and form a part of the
payments systems.
Market share of UCBs
As on March 31, 2006 there were 1853 UCBs, 84 scheduled commercial banks, 133 Regional Rural
Banks (RRBs) and 398 Rural Cooperative Banks (including 31 State Cooperative Banks and 367
District Cooperative Banks) in India. An analysis of market share of various bank groups indicates that
the share of UCBs in total bank deposits is relatively low. Nevertheless, their market share grew
steadily from 3.3% in 1990-91 to a high of 6.6% in 1999-2000, but thereafter gradually declined to
4.8% (provisional) in 2005-06, as shown in the following Table.
Growth of UCBs
In 1966 when the Banking Regulation Act was made applicable to UCBs, there were about 1100
UCBs with deposits and advances of Rs.167 crore and Rs.153 crore respectively. As at the end of
1996, the number of UCBs increased to 1501 and their deposits and advances rose significantly to
Rs.24,161 crore and Rs.17,927 crore. The UCBs continued to grow at a fast pace till 2003, when their
number increased to 1941 and their deposits and advances to Rs.1,01,546 crore and Rs.64,880 crore
respectively. Subsequently, the number of UCBs declined in 2006 to 1853 with total deposits of
Rs.1,12,237 crore and advances of Rs.70,379 crore. An overview of their growth since the 1990s is
given in Table 2 below.
The spectacular growth of UCBs in the late nineties and up to 2003, which had resulted in increasing
their penetration, ironically, also led to certain weaknesses in the sector that adversely affected public
perception and thereby, their competitiveness. A major reason for the decline in public confidence was
the crisis faced in 2001 by a large multi-state bank in the state of Gujarat, when the bank witnessed a
sudden 'run' on its branches, following rumours of its large exposure to a leading broker who had
suffered huge losses in the share market. The large-scale withdrawal of deposits within short time had
resulted in severe liquidity problems for the bank. The bank was also holding about Rs.800 crore of
inter-bank deposits from a large number of UCBs in the State and from other States, which posed a
systemic risk. In order to protect the interests of the general public and also that of the other
cooperative banks, RBI had issued directions to the bank restricting certain operations (acceptance of
fresh deposits, restricting payments to any single depositor to Rs.1000 and ban on fresh lending) and
requisitioned the Central Registrar of Co-operative Societies, New Delhi to supersede the Board of
Directors and appoint an Administrator. An order of moratorium was also enforced on the bank by the
Central Government for a short period. The bank was subsequently placed under a scheme of
reconstruction with the approval of Reserve Bank of India.
The Gujarat episode was followed by another major crisis in the state of Andhra Pradesh in 2002,
when one of the largest banks in the state faced a run, following a newspaper report regarding an
inquiry instituted into the affairs of the bank by the State Registrar of Cooperative Societies. The bank
was in a weak position, and ultimately, after attempts for its revival failed, its license was cancelled by
the Reserve Bank in 2004.
The decline is public confidence in the UCB sector deepened in the aftermath of the crisis in Gujarat
and Andhra Pradesh and concomitantly, the position of UCBs generally deteriorated. As on June 30,
2004, 732 out of 1919 UCBs were categorised in Grade III or IV signifying weakness and sickness.
Recognising the systemic risks and keeping in view the needs of its clientele, Reserve Bank reviewed
the entire gamut of legislative, regulatory and supervisory framework for these banks, and in March
2005, brought out a draft 'Vision Document for UCBs'. The vision document, which was drawn with the
main objective of maintaining the viability and competitiveness of the UCBs, discussed the
characteristics of the sector, analysed the problems afflicting the banks and proposed strategies for
dealing with problems affecting the sector.
I would first dwell upon the salient features of the UCB sector and, thereafter, elaborate on the vision
document and other initiatives of the Reserve Bank for ensuring viability and competitiveness of the
banks in this sector.
Salient features of the UCB sector
The UCB sector is unique in that there is significant degree of heterogeneity among the banks in this
sector in terms of size, geographical distribution, performance and financial strength. There is also
diversity among the urban cooperative banks in the levels of professionalism, standards of corporate
governance and access to advanced technology. Most importantly, the banks in this sector are under
dual control, with a part of the powers vested in the State Government and a part with Reserve Bank.
The Reserve Bank is, therefore, continuously evolving the regulatory and supervisory framework for
UCBs to ensure their soundness without sacrificing their competitiveness. But before, stepping into the
realm of regulation/ supervision, I would like to elaborate further on the aspect of heterogeneity of
UCBs, which would help in better understanding of the sector.
Heterogeneity
While on the one hand, there are a number of small neighbourhood banks functioning for mutual
interest of their members, on the other, there are several large UCBs with a wide network of branches,
large number of depositors and borrowers, many of whom are medium/large corporates. In the latter
kind of UCBs, the cooperative structure remains only as an organizational arrangement and their
business model and goals are more akin to commercial banks. The extent of heterogeneity can be
gauged by size-wise, region-wise and grading-wise analysis of the UCBs.
Size-wise distribution
The frequency distribution of UCBs in terms of deposits and advances their relative share is shown in
Table 3. It is observed that at the lower end of the spectrum, 36.2% of the UCBs have a deposit base
of less than Rs.10 crore and account for only 3.0% of deposits. At the same time, at the top end, only
14 banks had a share of 23% in the total deposits. More than 50% of the UCBs (962 banks) fell in the
deposit base range of Rs.10 crore to Rs.100 crore and accounted for 29.5% of total deposits.
Region-wise distribution
The distribution of urban cooperative banks across the country is skewed, with significant
concentration in southern and western regions. Table 4 gives the region-wise distribution of number of
UCBs and share of deposits of each region.
Grade-wise distribution
As part of its on-site inspection exercise, Reserve Bank has a system of categorizing banks into four
grades based on objective parameters relating to capital adequacy, asset quality, earnings,
compliance with CRR/SLR requirements and adherence to RBI guidelines and/ directives. While
Grade I covers banks with no major supervisory concerns, the other three grades would indicate
existence of supervisory concerns in increasing degree. Table 5 gives the grading-wise distribution of
banks as on March 31, 2006 (as per provisional data). It is seen that 37% of UCBs in the country,
accounting for 25.60% of total deposits, were in Grades-III and IV signifying weakness/and sickness,
while the remaining major portion (63%) of UCBs, accounting for 74.40% of total deposits, were in
Grades-I and II, indicating good/satisfactory performance/ financials.
Dual control
Urban co-operative banks are regulated and supervised by both, the State Governments, through the
Registrars of Co-operative Societies, and by the Reserve Bank of India. The Registrars exercise
powers in regard to incorporation, registration, management, amalgamation, reconstruction or
liquidation. In case of banks having presence in more than one state, the Central Registrar of
Cooperative Societies, on behalf of the Central Government, exercises such powers. The banking related
functions such as issue of license to start new banks or branches, matters relating to interest rates,
policies on loans and investments, prudential norms etc. are regulated and supervised by the Reserve
Bank of India. Duality of command is not unique to India, and requires delicate coordination for
obtaining synergies in regulatory and supervisory functions.
Competition and UCBs
Market scenario
Since 1991, the financial system has seen several reforms. The process of liberalization was set in
motion with gradual removal of restrictions on the operation of the pricing mechanism, especially
interest rates and statutory liquidity and reserve requirements - a process which is still underway.
Enhanced competition in both banking and non-banking financial sectors has been gradually
introduced - through a dynamic mix of public and private as well as domestic and foreign ownership -
along with deregulation or adaptive regulations. Simultaneously, regulation and supervision of banks,
financial markets and infrastructure were improved to increasingly align them with international
standards and best practices. The market driven economy, through deployment of more capital,
advanced technology and skilled human resources, is posing stiff and increasing competition to all
traditional institutions.
UCBs position
Market competition and the need to retain good clientele are affecting the UCBs too leading to
squeezing of the margins on many banks, especially the larger ones. The larger private sector
commercial banks, with their ability to invest more in technology and offer better remuneration to
attract skilled persons, are better off in fending competition. Understandably, therefore, the UCBs that
are competing in the same space, especially in cities and towns, are also being aggressively targeted
by the commercial banks and face tough competition. The smaller unit banks on the other hand, by
and large, manage to retain their niche role through personalized service and informal approach.
Corporate governance issues in UCBs
Most of the problems faced by the UCBs are due to governance issues and connected lending. In
UCBs borrowers have a significant say in the managements of the banks. This has the potential of
influencing the Boards to take decisions that may not always be in the interest of the depositors who
constitute the most important stakeholders of a bank. Also, unlike the case of institutions the shares of
which can be listed in a stock exchange and can change hands without affecting the capital base, in
case of UCBs, the shareholders can withdraw their contribution to capital and shrink the capital of the
bank and thereby limit its ability to increase risk weighted assets and expand business.
On this crucial aspect of corporate governance, I would like to, therefore, discuss a little about the
international best practices.
Corporate governance - international best practices for credit unions
As best practices guide, the World Council of Credit Unions has enunciated ideal governance
principles for credit unions, which are financial cooperatives similar to our urban cooperative banks.
These principles address the challenges of organizational power within credit unions at three separate
levels viz. External Governance, Internal Governance and Individual Governance.
External governance
All financial institutions, regardless of type, are expected to comply with the following basic standards
of transparency, auditing and financial reporting.
Transparency
•
The board should commit to regular, honest communication of its activities with members,
regulators and the general public in the spirit of full disclosure.
•
Financial statements, compliant with generally accepted accounting principles and local
regulatory standards, should be made available to members and the public.
Compliance
•
The board is expected to comply in both the letter and spirit of regulation, to cooperate fully
with its regulatory body and to comply with national laws.
•
The board should ensure that the credit union meets or exceeds the International Credit
Union Safety and Soundness Principles as well as any other relevant standards for financial
institutions.
•
The credit union should undergo annual external audits within 90 days of the end of each
fiscal year.
•
The audit relationship should be reexamined frequently and consideration be given to
changing the auditor at least every 3-5 years in a competitive bidding process.
Public accountability
•
The board of directors and management must be constantly cognizant of responsibilities to
governmental structures, including but not limited to regulators, legislative bodies, the media,
the community and the public.
Internal governance
Unlike for-profit entities, credit unions exist to serve their members. Thus, credit unions must address
this additional layer of governance related to their democratic, member-driven nature. This includes a
commitment to "one member, one vote," as well as adherence to the International Credit Union
Operating Principles and the role of the general assembly as the highest governing body.
Structure
•
The board of directors should be composed of an odd number, no less than five and no
greater than nine.
•
Consideration should be given to the rotation of directors.
•
Interested general members who comply with the standards of individual governance can
stand for nomination.
•
The board should encourage dialogue with general members at the annual general meeting.
•
The annual general meeting of the general assembly of members should be adequately
promoted to ensure sufficient member participation.
Continuity
•
The board should create strategies to maintain the competitiveness and sustainability of the
credit union.
•
The board should create succession plans for both directors and management that ensure
the continued existence of the credit union.
• The board should approve a disaster management and recovery plan.
Balance
•
The composition of the board should aim to adequately reflect the demographic make up of
its members and balance the financial service demands of members.
•
The board should seek to balance diversity and experience, but all directors must meet the
standards of individual governance.
Accountability
•
The board is formally accountable to the general assembly of members, which is the highest
governing body.
•
The roles and responsibilities of the board, committees and managers should be established
clearly in the bye-laws or other policies.
•
It is the duty of the board to establish strategic direction, approve policies and monitor
management's implementation of these policies and achievement of targets.
• It is the duty of management to prepare the plan and budget, undertake operations,
implement the policies approved by the board and achieve the targets set forth.
Individual governance
In order to perform their collective duties, the individual board members and managers have an
obligation to maintain ethical conduct and professionalism and to speak with a single voice once board
decisions have been made. Board members are also expected to possess the skills and technical
capacity necessary to fulfill their duties.
Integrity
•
The credit union should adopt a standardized code of conduct clearly explaining proper
behavior.
•
Directors or managers must not have criminal backgrounds, recent bankruptcies or penal
backgrounds.
• Immediate family members should not serve on the board or in management at the same
time.
•
Board members must excuse themselves from participating in discussions and voting on
matters from which they or their family have a potential conflict of interest.
•
The board must approve loans to directors or management. All such insider loans must be
made within the approved credit policy parameters and will be reported on a regular basis to
the full board.
•
Directors with delinquent loans more than three months will be removed from their position.
Competence
• All members of the board should have basic financial literacy, including the ability to interpret
financial statements and standards, or commit to acquiring these skills through education or
training within the first year of service.
•
Individual members should have specialized financial or business skills and/or a
memberfocused viewpoint.
Commitment
•
Directors should be willing and able to commit the necessary time to the credit union. Failure
to attend board meetings may result in dismissal.
•
Directors must respect the decisions of the board, adhering to all policies that have been
adopted, regardless of personal opinion.
The board and managers, as a cohesive unit, would have to ensure the credit union's compliance with
issues related to external and internal governance. In order to achieve this goal, each board member
has a duty to adhere to the principles of individual governance.
Competence of directors
In the context of urban cooperative banks in India, the first issue of importance is whether there is
collective expertise on the Board available to meet the competitive challenges before the bank to
ensure growth while maintaining soundness? In today's context, some of the areas where expertise at
the Board level is very useful is HR, IT and risk management. This enables the Board to get unbiased
advice from such members on the Board on managerial decisions and on matters referred to the
Board. Chairman and members of the Board should ensure that the Board has a broad based talent in
the Board in the areas of accountancy and audit, IT, HR and other expertise and experience from
industry, trade and agriculture. Domain knowledge of the Board members enormously increases the
quality of governance and the Chairman should be able to tap this talent to the advantage of the bank.
The other aspect relating to the composition of the Board relates to 'fit and proper' criteria for directors.
Internationally, the best principles of banking regulation require that regulators who give banks
licenses ensure banks are owned, controlled and managed by 'fit and proper' shareholders, directors
and senior managers. In most countries this is done through ensuring that all significant shareholders
fulfill the fit and proper tests, all directors adhere to "fit and proper" criteria and appointments by the
Board of CEOs of banks and key functionaries like CFO, COO and the auditors are approved by the
regulator.
Role of bank directors
An important aspect of corporate governance is the role of directors. It would be interesting to note
that the Bank for International Settlements (BIS) has spelt out the following principles that should
guide the bank director:
•
Understand their oversight role and their fiduciary "duty of loyalty" and "duty of care" to the
bank and its shareholders;
•
Avoid conflicts of interest, or the appearance of conflicts, in their activities with, and
commitments to, other organisations;
•
Recuse themselves from decisions when they have conflicts of interest that make them
incapable of properly fulfilling their fiduciary duties;
• Are able to commit sufficient time and energy to fulfilling their responsibilities;
• Are of a size that allows for efficiency and real strategic discussion;
•
Continue to develop and maintain an appropriate level of collective expertise as the bank
grows in size and complexity;
• Periodically assess the effectiveness of their own governance practices, including
nomination and election of board members, determine where weaknesses exist, and make
changes as necessary;
• Select, monitor and, where necessary, replace key executives, while ensuring that the bank
has an appropriate plan for executive succession, and determining that any intended
successor(s) are qualified, fit and proper to manage the affairs of the bank;
•
Serve as a checks and balances function vis-à-vis the senior management of the bank by
exercising their duty and authority to question and insist upon straight forward explanations
from management, and receive on a timely basis sufficient information to judge the
performance of management;
• Meet regularly with senior management and internal audit to establish and approve policies,
establish communication lines and monitor progress toward corporate objectives;
•
Promote bank safety and soundness, understand the regulatory environment and ensure the
bank maintains an effective relationship with supervisors;
•
Provide sound and objective advice, and recommend sound practices gleaned from other
situations;
• Contribute special expertise in overseeing a bank's activities which might not be available in
the rest of the parent or group;
•
Do not participate as the board of directors in day-to-day management of the bank;
•
Exercise due diligence in the hiring and oversight of external auditors in jurisdictions where
this is the responsibility of the board (in some jurisdictions, external auditors are hired
directly by shareholders).
Policy initiatives of Reserve Bank of India
Now, let us now take a look at various initiatives taken by the Reserve Bank for stabilising and
strengthening the Urban Cooperative Banks
Taking a view on the crisis faced by the sector time and again, the Reserve Bank, in the annual policy
for the year 2004-05, announced its decision to stop granting fresh licenses for formation of new
UCBs. This was followed up with a decision not to grant any fresh branch license as well. It was made
clear that this was necessitated pending a comprehensive review of the legislative and regulatory
framework governing the sector. It was in this background that a decision was taken to draft a vision
document for the sector to outline a framework that would facilitate the strengthening of the sector and
enable it play the assigned role of providing credit to the economically weaker sections.
Vision document for UCBs
The Reserve Bank eventually formulated a draft vision document, placed it in the public domain in
March 2005 and finalised it thereafter, with the following objectives:
(i) To rationalize the existing regulatory and supervisory approach keeping in view the
heterogeneous character of entities in the sector.
(ii) To facilitate a focused and continuous system of supervision through enhanced use of
technology.
(iii) To enhance professionalism and improve the quality of governance in UCBs by providing
training for skill up-gradation as also by including large depositors in the decision making
process / management of banks.
(iv) To put in place a mechanism that addresses the problems of dual control, given the present
legal framework, and the time consuming process in bringing requisite legislative changes.
(v) To put in place a consultative arrangement for identifying weak but potentially viable entities
in the sector and provide a framework for their being nurtured back to health including, if
necessary, through a process of consolidation.
(vi) To identify the unviable entities in the sector and provide an exit path for such entities.
MOU with state governments and constitution of TAFCUBs
In pursuance of the proposals in the draft vision document, state governments having a large number
of UCBs were approached for signing memorandum of understanding (MOU). Some of these state
governments have since signed MOUs. The memorandum, in fact, provides the basis for the
constitution of Task Force for Urban Co-op. Banks (TAFCUB) in each State, which is the forum for the
consultative decision making process. The TAFCUB has, apart from the representatives of the RBI
and the State Government, those of the UCBs sector as well. The MOU also provides for
professionalising the audit and the Reserve Bank's role in improving IT and HR levels in the UCBs.
The combined access to information from local and national level federations of the banks, as also
from the regulators and supervisors, has made the TAFCUB effective instruments for consolidating the
sector through quick and non-disruptive exit of unviable entities and revival of the viable ones.
Recommendations of the TAFCUBs have the consent of all stakeholders including Reserve Bank of
India and, therefore, can be implemented speedily by all concerned. In states where TAFCUBs have
not yet been constituted, pending signing of MOU, the potentially viable and non-viable banks do not
have the benefit of coordinated deliberations on their future set-up, by both regulators/supervisors. In
such states, Reserve Bank directly initiates supervisory action as per a graded supervisory action
framework, which suggests specific and objective course of action for the banks that are in different
stages of weakness. In keeping with the consultative process initiated with the state governments, the
Reserve Bank has sought to extend the arrangement to the UCBs functioning in more than one state,
through a MOU with the Central Registrar and enlarging the scope of the TAFCUBs to cover the
Scheduled UCBs, which are systemically even more significant. Further, the consultative approach is
sought to be extended to the liquidation stage to facilitate early lodging and settlement of insurance
claims.
Arsing out of the comfort of coordinated supervision/regulation of banks in the states that have signed
the MOU, certain facilities have been extended to the banks in such states. Requests from eligible
banks in such states for additional business opportunities, like setting up currency Chests, selling
mutual funds, providing forex services, opening of new ATMs etc. are also considered.
Strengthening of regulatory/supervisory framework
The RBI recognized that there is a need to mitigate the risk to which the system is exposed by
providing a regulatory and supervisory framework that will appropriately address the problems of the
sector as also the shortcomings of dual control. Significant features of the current
regulatory/supervisory framework are outlined below.
Dispensing with the one-size-fits-all approach
In order to achieve the objectives set out in the Vision document, Reserve Bank of India is
implementing a two-tiered regulatory and supervisory regime. Banks with deposits under Rs.100 crore
and whose operations are limited to a single district, are considered to be more closely epitomizing the
spirit of cooperative banking and as such are placed under simplified regulations to enable them to
gradually gain in strength, such that, over a period of 3 years they can be brought at par with all other
banks in term of performance, strength and regulatory prescriptions.
As a step in this direction, recently Reserve Bank of India has allowed the smaller banks to adopt 180
days delinquency norms for classification of assets as non-performing, instead of the 90 days norm
which is applicable for the larger cooperative and all commercial banks in India. This is intended to
provide a measure of relief to the small UCBs and improve their financial performance through lower
Non Performing Advances requiring lower provisioning, which in turn would translate into higher profits
that could be used to shore up the capital base of these banks. Incidentally, about a thousand UCBs
stand to gain from such differential regulatory regime.
Further, in view of the market risks associated with investments made in Government securities, the
smaller UCBs have been given exemption (upto 15 percent of their Net Demand and Time Liabilities)
from the prescribed SLR of 25% required to be maintained in the form of government securities, to the
extent of funds placed in interest bearing deposits with the public sector banks. Another, regulatory
relaxation available to the small banks is in terms of provisioning requirement for 'standard advances'
which has recently been enhanced for UCBs from 0.25% to 0.40%, but this enhancement has not
been made applicable to banks having deposits below Rs.100 crore and whose operations are
confined to a single district.
Supervision through enhanced use of technology
With regard to the mechanism for supervision, the smaller banks, which are limited by their size and
type of operations, pose lower systemic risks and therefore it is envisaged that they would be
supervised by a combination of simplified off-site surveillance system of the RBI and on-site audit