Circulars

Review by Board of Supervision (BoS) - Post Inspection ‘Exit Meeting’ with Supervised Entities (SEs) & Compliance Monitoring Mechanism – Revised procedure for submission of Compliance by State Cooperative Banks/ Central Cooperative Banks and Regional Rural Banks

EC No. 211 / DoS – 25 / 2022

Ref. No. NB. DoS. Pol. HO / 2513 / J-1 / 2022-23

20 September 2022

CONFIDENTIAL

The Chairman, All Regional Rural Banks

The Managing Director, All State Cooperative Banks

The Chief Executive Officer, All District Central Cooperative Banks

Dear Sir / Madam

Review by Board of Supervision (BoS) - Post Inspection ‘Exit Meeting’ with Supervised Entities (SEs) & Compliance Monitoring Mechanism – Revised procedure for submission of Compliance by State Cooperative Banks / Central Cooperative Banks and Regional Rural Banks

We invite your reference to our circular Ref. No. NB. DoS. HO. Pol. / 374 / J-1 / 2016-17 [No. 98 / DoS – 17 / 2016] dated 05 May 2016 on Compliance Monitoring Mechanism and procedure for submission of compliance to Inspection Report by State Cooperative Banks (StCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs).

2.Based on the recent developments and direction of Board of Supervision (BoS) in its 85th meeting, it has been decided to further refine the procedure for submission of compliance report by Supervised Entities (SEs) and norms for rating of compliance. Salient features of the revised compliance monitoring mechanism are as follows:

(a) Submission of Compliance Report

All the observations in IR requiring compliance from the bank will be classified as “major” and “minor / other” observations.

Since all the inspections of the banks are being conducted through SuperSoft, the supervision software, from 2022-23, the Inspection Report will be made available to the banks through SuperSoft and the compliance for the same after approval of Board should be submitted by the bank through SuperSoft within 60 days from the date of issue of IR.

In respect of inspections where reports have been issued outside Supersoft, the banks may submit Board approved Compliance Report on all observations to respective Regional Office of NABARD, so as to reach within 60 days from the date of issue of IR.

In case, the bank submits an advance copy of the Compliance Report within 60 days but without the approval of Board, the same will not be treated as submission of Compliance Report.

(b) Extension of time for submission of Compliance Report

On account of some genuine reasons / reasons beyond its control, if the bank feels that it would not be able to furnish Compliance Report within due date, it may apply before the due date, to our Regional Office for extension of time for submission of Compliance Report, stating the reasons for such extension. Our Regional Office may grant extension of time upto a maximum of 45 days (not more than 30 days at a time) in deserving cases for submission of Compliance Report. Bank should ensure submission of Complinace Report within such extended time and no further extension would be granted.

(c) Dispensing of Pre-compliance meeting and introduction of Exit Meeting

1) It has been decided to dispense with conducting of Pre-compliance Meetings with the CEO / Chairman of the banks and instead put in place a structured meeting between ROs and the CEO / Chairman of the Supervised Entities.

2) After the Inspection team conducts wrap-up meeting with the Board of Directors post inspection and issues Inspection Report to the bank, the CEO / Chairman of the bank will be invited by the respective Regional Office of NABARD for an “Exit Meeting” within 20 working days from the date of issuance of IR to discuss the major inspection observations and supervisory concerns pertaining to the bank. Senior officers of DoS, HO will selectively participate in such meetings.

3) The CEO / Chairman should come prepared with time bound action plan against observations / issues of supervisory concern. During the meeting, information regarding the action initiated / completed by the bank and time bound action plan, if any, to comply with the observations will be discussed in detail.

In case, the bank fails to submit the compliance report or CEO / Chairman fails to attend the Exit Meeting, supervisory action may be initiated against the bank.

(d) New Compliance Rating Matrix

The compliance report submitted by the bank will be scrutinised and rated by respective ROs of NABARD. In order to assess the factual level of compliance by the bank, the same will be again examined and rated during the course of next inspection. The parameters for rating of compliance during desk scrutiny and during the conduct of next inspection will be same. The new Compliance Rating Matrix based on the quality of compliance to observations of the IR is furnished in Annexure – I for information.

(e) Further Compliance

If the Compliance Report is not to the expected level, the system of calling for further compliance would be continued till a satisfactory compliance is received. The banks may submit further compliance within a period of 15 days with specific timelines for rectification of those deficiencies where further compliance is sought.

(f) Follow-Up Meeting (FUM) - Discussions with CEO / Chairman

In case the Compliance Report submitted by the bank is not found satisfactory (rating marks below 50) on desk scrutiny, respective Regional Office of NABARD will convene a Follow-Up Meeting (FUM) with the CEO / Chairman of the bank with a view to ensuring submission of sustainable compliance on the observations made in IR. The CEO / Chairman have to ensure compliance by submitting a time-bound action plan and personal commitment to implement the same within the specified timeframe.

(g) Compliance Closure Procedure

The compliance submitted by the bank should be specific and indicate clearly that the defect has been rectified. Otherwise, the compliance should give an action plan to remove the defect in a specific time frame. However, vague compliance such as “noted”, “action will be taken”, “action being taken”, etc., should be avoided.

Observations would be treated as closed only if the bank has ensured completion of corrective action on the observations / deficiencies pointed out in the IR.

5.Bank should ensure sustainable compliance, which should be focused on time bound verifiable improvement against each observation to achieve system level compliance. A brief description of sustainable compliance is given in Annexure – I.

6.The revised compliance monitoring mechanism and revised compliance rating norms will be applicable for all inspections of StCBs, DCCBs and RRBs conducted with reference to financial position as on 31 March 2022 and thereafter.

7.SEs may note that this circular supersedes instructions contained in our earlier circular Ref. No. NB. DoS. HO. Pol. / 374 / J-1 / 2016-17 [No. 98 / DoS – 17 / 2016] dated 05 May 2016 on Compliance Monitoring Mechanism.

Yours Faithfully

Sd/-

(K. S. Raghupathi)

Chief General Manager

Encl.: Annexure – I

Annexure - I

Rating of Compliance Report furnished by the bank on the observations of the Inspection Report

Sustainable Compliance – A brief description

Action taken by the bank is considered sustainable, if it,

a) addresses the specific deficiency indicated in the inspection report and also the control process to prevent such occurrence in future at bank level;

b) reflects complete action;

c) enumerates a mechanism to stipulate accountability on failure to comply with the extant guidelines;

d) indicates risk mitigation measures on identified deficiency;

e) does not show partial compliance and

f) identifies root-cause of problem and also mechanism put-in place to address the same at system level.

The new Compliance Rating Matrix is based on the quality of compliance furnished by the banks to observations of the Inspection Report (IR). The compliance to each observation will be tested on six broad parameters and these parameters will be rated on a rating scale of 0, 1, 2, 3, 4 & 5 marks as shown in table below:

Rating Matrix

Sl. No. Broad Parameters Maximum Marks to be awarded
a No compliance/Compliance not accepted 0
b Partially complied (based on judgement) – 25% 1
c Partially Complied (based on judgement) – 50% 2
d Specific Compliance to the exact observation 3
e Moving towards Sustainable Compliance 4
f Sustainable Compliance 5

The parameters for rating the compliance at the desk level and field level (undertaken during conduct of next inspection by Inspecting Officers (IOs)) will be same. In desk scrutiny, the compliance cell at Regional Office (RO) of NABARD will review and award appropriate marks on the basis of the reasonableness of Action Plan prepared / action taken / corrective measures initiated by banks on observations of IR. Whereas, in field scrutiny, the IOs during the conduct of next inspection will verify the tenability, effectiveness and sustainability of the compliance already submitted / compliances carried forward from the previous inspection, if any and award marks. Marks will be awarded based on the outcome/achievement.

The following rating matrix format will be utilised for awarding marks to each observation:

Desk Scrutiny /Field Scrutiny

Name of the Bank:-

Date of Reference of the Inspection : 31 March -----------

Sl. No. List of Observations Marks awarded based on rating matrix (0/1/2/3/4/5 Marks)
1 Observation 1
2 Observation 2
3 Observation3…. etc.
Total no of observations=X Total marks obtained =Y

For each observation, the compliance provided by the bank will be rated between ‘0’ and ‘5’ as indicated in Rating Matrix above. If there are ‘X’ observations, the maximum marks that will be awarded to the bank is ‘5X’, ‘5’ being the highest mark that can be awarded against each observation. The total marks obtained is ‘Y’.

The calculation of awarding Composite Compliance Rating (CCR) is as under:

Total no. of observations X
Maximum Marks 5X
Total marks obtained Y
Composite Compliance Rating (%) = Y/ (5X)*100

The composite compliance rating (%) would be

Total marks obtained Y

Composite Compliance rating = ------------------------------ = ------ x 100 Maximum marks 5X

Illustration:

Consider a case where there were ten observations. In that scenario, the composite compliance rating will be calculated as below:

Observations No Compliance Partially Complied (25%) Partially Complied (50%) Specific Compliance Moving towards Sustainable Compliance Sustainable Compliance
(0 mark) (1 mark) (2 mark) (3 mark) (4 mark) (5 mark)
(a) (b) (c) (d) (e) (f)
Obs 1 5
Obs 2 0
Obs 3 3
Obs 4 2
Obs 5 1
Obs 6 2
Obs 7 1
Obs 8 2
Obs 9 5
Obs 10 4
Total Marks obtained 0 2 6 3 4 10
Final Marks obtained (Y = Sum of a+b+c+d+e+f) 25
If no. of observations are 'x', then the maximum marks for that bank can be maximum of '5x'.
Marks obtained (Y)= 25
Maximum Marks (5 x no of observations) 50
Composite Compliance Rating = 50%

Based on the composite compliance rating calculated above, the SEs will be categorised into five categories as indicated below:

Overall Compliance category and Rating marks percentage awarded based on Desk Scrutiny / Field Scrutiny

Sl. No. Category Marks awarded
1 Excellent 90 and above
2 Very Good 75 and above but below 90
3 Good 60 and above but below 75
4 Satisfactory 50 and above but below 60
5 Unsatisfactory Below 50

Note :-

1. In case the bank did not comply with Section 22(3)(b) of B R Act, 1949 / Section 42(6)(a)(ii) of RBI Act, 1934, the compliance should contain plan of action / steps proposed to remove all the deficiencies which had brought the bank in ‘non-compliant’ category’.

2. Action plans (if any) should be time bound with monitorable targets.

3. During the field scrutiny, in case, there were no observations in the previous IR requiring compliance or the bank had achieved the compliance parameters on sustainable basis, full marks will be awarded against such observations.

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