Dear Sir/Madam,
Enhancement of transparency on bank’s affairs
through disclosures-UCBs
The Reserve Bank has been taking several steps
from time to time to enhance the transparency of banks by having comprehensive
requirements for disclosure in tune with the best practices. RBI circular dated
30.10.2002 advising UCBs having deposits of Rs 100 crore and above to disclose
certain information with respect to CRAR, NPA, etc as '
Notes on Account' to their Balance Sheet was one such measure.
Background
2. The Joint Parliamentary Committee (JPC)
on Stock Market Scam and Matters Relating Thereto in their report (December
2002) had recommended that the comments made by Reserve Bank in the inspection
reports of banks should be published in the Annual Reports of the banks along
with the financial results, to ensure greater transparency, so that shareholders
get a better idea about the operations of the bank. In view of the sensitive
nature of the disclosures and their impact on the interest of depositors,
the JPC recommendations were examined by the Reserve Bank in consultation
with the Standing Technical Advisory Committee on Financial Regulation (STACFR)
and the Board for Financial Supervision (BFS). In this regard, the Reserve
Bank also took into account the recommendations of Committee on Banking Sector
Reforms (1998), Advisory Group on Transparency in Monetary and Financial Practices
(2000) and Committee on Procedures and Performance Audit on Public Services
(2004).
Best Practices
3. It is noteworthy that the third pillar
of the Basel II addresses how safety and soundness of the banking system can
be strengthened by market discipline through enhanced transparency in bank’s
disclosures to the public. It is also internationally recognized that, while
transparency strengthens market discipline, due to the inherent
need to preserve confidentiality in relation
to its customers, banks may not be able to disclose all data that may be relevant
to assess its risk profile. In this background, while mandatory disclosures
as stated at para 1 above, include certain prudential parameters such as capital
adequacy, level of NPAs etc., the supervisors, themselves may not disclose
all or some information obtained on-site or off-site. In many countries, there
is automatic and non-discretionary public disclosures of penalties imposed
for violation of any regulation. In some countries, wherever there are supervisory
concerns, "prompt corrective action" programmes are normally put
in place, which may or may not be publicly disclosed. Circumspection in disclosures
by the supervisors arises from the potential market reaction that it might
trigger, which may not be desirable. Thus, in any policy of transparency,
there is a need to build processes which ensure that the benefits of supervisory
disclosure are appropriately weighed against the risk to all stakeholders
of non-disclosure in each instance.
4. On balance, while there could be considerable
risks and judgments involved in the disclosure of information obtained by
the supervisor, there is significant merit in adopting a policy of transparency
in regard to statutory penalties levied and other specific supervisory actions.
Disclosure of penalties imposed by RBI
5. At present, Reserve Bank is empowered
to impose penalties on a primary (urban) co-operative bank under the provision
of 47(A) of the Banking Regulation Act, 1949(AACS), for contraventions of
any of the provisions of the Act or non-compliance with any other requirements
of the Banking Regulation Act, 1949(AACS) order, rule or conditions specified
by Reserve Bank under the Act. The imposition of penalty on a bank is decided
after a due process of advising the bank and seeking its explanation so as
to afford a reasonable opportunity to the bank for being heard. Considering
the above and consistent with the best practices in disclosure of penalties
imposed by the regulator, it has been decided that disclosure of the details
of the levy of penalty on a bank in public domain will be in the interests
of the members and depositors.
Disclosure of actions taken on the basis of
inspection reports or other adverse findings
6. It has also been decided that strictures
or directions on the basis of inspection reports or other adverse findings
should be placed in the public domain.
Mode of disclosure for penalties
7. The mode of disclosures of penalties,
imposed by Reserve Bank will be as follows: