Bank and Non-Bank Supervision

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BANK AND NON-BANK SUPERVISION The Reserve Bank of India (RBI), the country's central bank, carries out the supervision and regulation of banks and non-bank finance companies under the provisions of the Banking Regulation Act of 1949 and the Reserve Bank of India Act of 1934. The High Level Coordination

Main supervisory agencies in the Indian financial sector
Agency Jurisdiction
SOURCE: Courtesy of author.
Reserve Bank of India (RBI) Commercial banks, urban cooperative banks, local area banks, non-bank finance companies, financial institutions, primary dealers
Securities and Exchange Board of India (SEBI) Stock exchanges, merchant bankers, market intermediaries, rating agencies, mutual funds
Insurance Regulatory and Development Authority (IRDA) Insurance companies
National Bank for Agriculture Development (NABARD) State and central cooperative banks, regional rural banks, agricultural and rural development banks
National Housing Bank (NHB) Housing finance companies

Committee of the government of India provides a forum in which banking, securities, and insurance supervisors can address policy differences. The main supervisory agencies in the financial system and the institutions in their jurisdiction are given in Table 1.


India's banking system dominates its financial sector, with over 60 percent of the combined assets, and is the focus of prudential supervision, the framework for which has evolved since the establishment of the RBI in 1935. Earlier, both banking and non-banking companies were governed under the provisions of the Indian Companies Act of 1913, which was amended in 1936 to include a chapter on banks. This evolved into the Banking Companies Act of 1949 was renamed the Banking Regulation Act of 1949 from 1 March 1966, at which date certain provisions were extended to cooperative banks.

The Banking Regulation Act is a comprehensive piece of legislation which provides the RBI with the authority and the instruments to make supervisory interventions through the life cycle of banking companies. The RBI can issue directions, obtain information, inspect the books and accounts, appoint nominees to boards, effect change in management, impose monetary and other penalties, cancel the license, and cause merger, amalgamation, or closure of banks. The act also incorporates a powerful enabling clause to issue directions to banks on matters of policy and administration.

Traditionally, on-site inspection has been the main instrument of supervision, with a comprehensive off-site surveillance system introduced only in 1995. Under this system, banks submit quarterly data, which are processed and stored electronically and used for supervisory analysis and intervention. The RBI had, however, begun limited inspection of banks with their consent as far back as 1940 to arrive at their "free and exchangeable value of assets" for the purpose of determining their eligibility for scheduling under the RBI act. In 1946 the objective was widened to include a determination of "whether the affairs of the bank were being conducted in a manner detrimental to the depositors," thus adding a qualitative appraisal of management and operations to a quantitative assessment of solvency.

Since 1958, banks have been inspected annually to ensure their compliance with directions and regulations. These inspections now also aim at assessing the risk management capabilities of the banks. With the implementation of Risk Based Supervision, which is currently being tested, supervisory resources (including inspection frequency and focus) will be based on the risk profile of individual banks.

The approach followed has been one of gradual strengthening of the prudential framework, with creeping targets normally announced well in advance to prevent sudden shocks. For example, the capital adequacy ratio was increased from 4 percent to 9 percent over a five-year period while the contraction of the delinquency period for nonperforming loans to ninety days was announced three years before scheduled implementation in 2004.

The position of compliance with standards and practices dispensed by the Basel Committee on Banking Supervision (committee of the Bank of International Settlement, or BIS, which is based in Basel, Switzerland) has been evaluated by three groups since 1998: internally; through a group of outside experts set up by the Committee on Standards and Codes; and by the International Monetary Fund. The assessments have found the supervisory system for banks largely compliant with the Twenty-five Basel Core Principles of Effective Banking Supervision and identified gaps mainly in the areas of consolidated supervision, country risk management, and interagency cooperation.

There have been no systemic crises in the commercial banking system since India's economic liberalization of 1991, despite instances of individual institutional stress. The challenges now arise from the difficulty that the supervisors may face in taking appropriate action in a system dominated by state-owned banks.


Traditionally, non-bank trading and manufacturing companies accepted public deposits to finance their working capital requirements and were subject to the provisions of the Companies Act. In the 1950s, there was an expansion in the deposit-taking activities of financial non-banks, notably hire-purchase companies. Bankers protested the "diversion" of potential bank deposits by unregulated entities. This led to the Banking Laws (Miscellaneous) Provisions Act of 1963, which authorized the RBI to specify the terms and conditions applicable to public deposits, to call for information about these deposits, and to issue directions, conduct inspections, and impose penalties. In 1966, by which time non-bank deposits had reached 8 percent of bank deposits, the RBI issued comprehensive directions.

The prudential framework for supervision is more focused on the deposit-taking non-bank finance companies, and by an amendment to the RBI act in 1997, the RBI now has legislative authority to give such companies directions on prudential norms and take corrective action including prohibiting them from accepting further deposits or alienating assets; imposing penalties and filing for their winding up. The instruments of supervision are similar to those of banks and include periodic on-site inspection, off-site reporting, and surveillance. A market intelligence function and forums for coordination with other regulators and enforcement agencies are integrated into the supervisory response. The introduction of the strengthened framework that incorporates strict minimum requirements for registration has led to a meltdown in the industry, with a large number of companies having been denied permission to commence or continue business.

Aditya Narain

See alsoBanking Sector Reform since 1991


Balachandran, G. The Reserve Bank of India, 1951–1967. New Delhi and New York: Oxford University Press, 1998.

International Monetary Fund. "Implementation of the Basel Core Principles for Effective Banking Supervision, Experiences, Influences, and Perspectives." Available at <>

Reserve Bank of India. History of the Reserve Bank of India, 1935–1951. Mumbai: Reserve Bank of India, 1970.

——. Core Principles of Effective Banking Supervision: The Indian Position. Mumbai: Reserve Bank of India, 1999.

——. Report of the Standing Committee on International Financial Standards and Codes. Mumbai: Reserve Bank of India, 2002.

——. Annual Reports on the Trend and Progress in Banking in India. Mumbai: Reserve Bank of India, 1949–2002.

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Bank and Non-Bank Supervision

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