The National Bank has been entrusted with the responsibility of conducting inspection of SCBs, DCCBs and RRBs under the provisions of Section 35(6) the B.R. Act 1949 since its formation in July 1982. There have been attempts to bring about greater convergence and congruence between the objectives of supervision and the dynamics of external environment and the expectations of supervised. We have come a long way of 24 years of banks' supervision and there have been paradigm shifts in the approach, focus, process and overall strategy of supervision.

(a) A Technical Group (TG) was constituted in July 1996 to look into the aspects of both on-site and off-site inspection. The TG recommended, among others, introduction of Off-site Surveillance System (OSS), system inspection, portfolio inspection, management audit and changes in on-site inspection methodology to make inspection more effective.

(b) In order to have a further refinement in the inspection strategy, an 'Expert Committee to Review the Supervisory Role of the National Bank', headed by Shri U.K. Sharma, former ED of the RBI, was constituted in January 1998. The major recommendations of the Committee included application of capital adequacy norms to Cooperative Banks and RRBs, to change the approach on the on-site examination to focus on the statutory mandate and concentrate on core assessment, leaving collateral appraisals to supplementary appraisals, changes to be effected in the inspection documents, keeping in view the focus of inspection, a rating system to be adopted for evaluating the performance of the banks, OSS should aim at continuous monitoring of performance of banks, constitution of Board of Supervision (BoS), empowering the NABARD with statutory powers by suitable amendments to B.R. Act, 1949 (AACS).

Inspection Department (ID) was renamed as Department of Supervision (DOS) and the process of re-engineering of the Department was taken up for successful implementation of the revised inspection strategy, from 1998-99. The DoS, HO which was located at Hyderabad was shifted to new Corporate Office Building at Mumbai during 2001-02.

Initially a system of inspection of the Apex institutions by HO and DCCBs/RRBs by ROs was in vogue. ROs were delegated powers to finalise and issue reports on inspections conducted by them during the late 90's. With effect from 1 April 2004 , statutory inspection of all cooperative banks, RRBs and voluntary inspection of SCARDBs and other apex institutions are being conducted by ROs.

With a view to adhering to the accepted programme of bank inspections, steps were taken to rationalise the composition of inspection team, time of inspections, etc. during the year 1985-86. During the year 1989-90 a new orientation to the inspection methodology was provided by laying special emphasis on the scientific financial analysis of the banks inspected with a view to gauging their financial health on the basis of various financial ratios.

Inspection strategy was reviewed and revamped during 1995-96 in order to make it more effective. For ensuring a systematic and continuous monitoring of financial position of the banks, in-depth off-site, systems analysis and portfolio inspections have been incorporated as core part of inspection methodology for bringing about qualitative improvement in the working of the banks. In the changed scenario, the inspection process has gone beyond fault finding/ catch-all approach to the broader concept of supervision which encompasses On-site inspection, OSS and Supplementary Appraisal. Following the application of prudential norms during 1995-96, necessary guidelines were issued to the SCBs/ DCCBs and RCS to facilitate implementation of the norms.

Prudential norms were extended to SCARDBs during 1997-98. Focus had been laid on risk assessment / analysis / application of IRAC norms DoS had made intensive efforts for internalisation of prudential norms by banks.

The frequency of statutory/ voluntary inspections was increased from 2005-06. Accordingly, inspection of all SCBs as well as those DCCBs and RRBs which are not complying with minimum capital requirements as required under B.R. Act, 1949 (AACS) and RBI Act, 1934, respectively and the voluntary inspection of all SCARDBs are being conducted, on an annual basis. The statutory inspection of those DCCBs and RRBs having positive networth and also voluntary inspection of Apex Cooperative Societies/ Federations will continue to be conducted once in two years. With the introduction of annual inspections, the system of conducting quick inspections has been dispensed with.

Rating norms were put in practice for

(a) supervised banks,
(b) inspection reports and
(c) compliance reports.

A system of due dates for submission, review and issue of inspection reports was evolved and enforced. The system of quality scrutiny of IRs by HO and ROs and communicating rating to ROs was put in place.

Concerted and multi-pronged efforts for improving the contents and quality of IRs were undertaken which included intensive training to IOs, conducting Regional Seminars/workshops on Inspections, Bi-monthly meetings of IOs, Senior Officers Group meets, etc.

With a view to guiding IOs in the conduct of inspections and drafting the reports, a Manual on inspection of CCBs was prepared during the year 1987-88 which have been revised from time to time. A programme of structured visits by the GM-in-Charge of the then Inspection Dept. to ROs was introduced during the year 1987-88 to guide inspection staff on various issues on inspection.

Manual and check lists for facilitating inspection of CCBs were prepared during the year 1989-90.

As a part of the efforts to improve the quality of inspection, a brochure entitled "Tips for conducting inspection of banks' was issued during the year 1994-95 and also the revised guidelines for inspection of "Apex Weavers Societies", for internal use.

A system of discussions with the CEOs of the inspection bank by GM (CGM) of ROs, one month after issue of IR was introduced during 1986-87 to expedite compliance. ROs were advised to hold quarterly review meetings with MDs of SCBs and SCARDBs with focus on areas of supervisory concern and also to review the quality of compliance reported by the banks.

During the year 2001-02, as per revised strategy, apart from giving satisfactory compliance on IRs, within 90 days with their Board approval, the banks are required to furnish compliance on Core issues within 45 days from the date of issue of IR. The CEO and President of the bank would be invited to RO/HO for discussion on compliance on core findings. Rating of compliance submitted by the banks is being done as per the parameters prescribed.

DoS has put in place a series of supervisory interventions relating to the cooperative banks which are not complying Section 11(1) of B.R.Act, 1949(AACS). These include submission of the exemption application, the Action Plan for recompliance with financial commitments of the stake holders, periodic MIS returns and holding periodic review meetings of State Group for these banks, monitoring and review of the banks' performance, etc.

The National Bank conducts regular reviews in respect of frauds, embezzlements, etc. occurring in Coop. Banks and RRBs and has been following up these cases with the banks concerned and RCS/ Sponsor Banks, etc. Besides, separate returns have been prescribed for reporting fraud cases and other malpractices and the same is closely monitored. A 'Manual of Internal checks and Branch Control for Coop. Banks' was brought out to enable the banks to follow effective systems. In order, interalia to deal effectively with the cases of frauds, the Coop. Banks and RRBs had been advised in 1994-95 to set up Vigilance Cells.

Based on the recommendations made by the Ghosh Committee on frauds in banks, guidelines were issued to all Coop. Banks during 1994-95 for institutionalising concurrent audit system. Guidelines on setting up of Audit Committees were also issued to all SCBs and DCCB during the year 2003-04. With a view to bringing about Audit rating scales in consonance with the Supervisory Rating Norms, the scales were fine tuned to ensure correct financial assessment of cooperative banks by statutory auditors and supervisors. A system of Annual Conference of Auditors at the National level and Sensitisation Meets for Auditors at Regional level were organised. Guidelines on Risk Management System were issued to Cooperative banks and RRBs during 2004-05.

Apart from generating enormous information / data- base on supervised banks through IRs/ statutory and MIS returns, various steps were initiated for integrating inspection findings with the operations of the functional Departments in NABARD as below:

• Credit limits and releasing refinance linked with inspection findings and submission of Sanctioning satisfactory and timely compliance.
• Recommendation for issue of licence/ cancellation of licence under Sec. 22 of BR Act.
• Special studies undertaken by operational Departments on the basis of inspection findings.
• Constant review of credit policies, based on inspection inputs.
• Enforcing lenders' financial discipline.
• Drawing specific Action Plan for focussed attention on weak banks and turnaround strategies.

1. The RCS of all the States were advised to ensure that the cooperative banks in the State may be brought within the purview of the State vigilance machinery. In the absence of such a set-up, the RCS may take up the responsibility. The RCS of States were also requested to ensure that Vigilance Cells are established in SCBs and DCCBs within three and six months respectively. Guidelines for establishment of Vigilance Cell were also provided.
2. To have a clear-cut bifurcation between loans for agriculture and those for allied activities, a list of activities covered under direct agricultural advances was provided to SCARDBs for the purpose of classification of these loans under prudential norms.
3. The advantage of DICGC's deposit insurance cover and need to not only keep the deposits of the public fully covered but also ensure the availability of insurance cover at all times, was emphasised upon all the SCBs and DCCBs.
4. It was clarified that charging of interest at monthly rests will not be applicable to agricultural advances. All the SCBs and DCCBs were advised to strictly adhere to the norm and to take steps to reverse the interest charged, if any, in contravention of instructions, immediately. In this regard, if any lapse is noticed during audit / inspection of the banks, it would be viewed seriously and NABARD may impose penalty for such lapse.