How RBI regulates Commercial Banks
To do a business of commercial banking in India, whether it is India or Foreign, a license from RBI is required.
Opening of Branches is handled by the Branch Authorization Policy. This policy was made easier in recent times and an important provision is that :
Indian banks no longer require a license from the Reserve Bank for opening a branch at a place with population of below 50,000.
RBI policy ensures high quality corporate governance in banks.
CRR and SLR:
These are called Statutory Pre-emptions. 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 interest rates on most of the categories of deposits and lending transactions have been deregulated and are largely determined by banks. 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.
Prudential Norms refers to ideal / responsible norms maintained by the banks. RBI issues "Prudential Norms" to be followed by the commercial banks to strengthen the balance sheets of banks. Some of them are related to income recognition, asset classification and provisioning, capital adequacy, investments portfolio and capital market exposures. RBI has issued its guidelines under the Basel II for risk management.
Apart from that, RBI issues the public disclosure norms to enforce the market disciplines. Now all banks are required to disclose in their annual reports about capital adequacy, asset quality, liquidity, earnings aspects and penalties, if any, imposed on them. Similarly, the KYC norms (Know Your Customer) Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) guidelines are some of the major issues on which RBI keeps issuing its norms and guidelines.
Annual Onsite Inspection:
RBI undertakes annual on-site inspection of banks to assess their financial health and to evaluate their performance in terms of quality of management, capital adequacy, asset quality, earnings, liquidity position as well as internal control systems.
Based on the findings of the inspection, banks are assigned supervisory ratings based on the CAMELS rating.
OSMOS refers to Off Site Surveillance and Monitoring System. The RBI requires banks to submit detailed and structured information periodically under OSMOS. On the basis of OSMOS, RBI analyzes the health of the banks.