One Step Ahead? How India’s Supervisory Model Measures Up

Michelle W. Bowman, the Vice Chair for Supervision, Board of Governors of the Federal Reserve System, in a speech dated June 6, 2025, corroborated the facts of gradual erosion of the link between supervisory ratings and actual financial condition of supervised entities in the United States. The Federal Reserve’s supervisory statistics for the first half of 2024 showed that a majority of institutions that met all supervisory expectations for capital and liquidity standards were nevertheless rated unsatisfactory in their supervisory reports. 

These mismatches were described as “odd”, and the existing approach is now being subjected to a comprehensive overhaul in the US. The intended outcome is a more coherent framework that can assess whether a firm is well managed and has demonstrated resilience under a range of conditions and stress scenarios. 

Greater emphasis is proposed to be placed on material financial risks, with lesser reliance on subjective supervisory judgement, and more attention would be devoted to how these risks relate to the financial health of individual institutions and the banking system as a whole.

The cited proposals on supervisory reform are, however, not new in the literature of financial oversight. That they were not previously embedded in the American system is somewhat surprising. 

The root causes of the 2023 banking turmoil in the US had already highlighted similar concerns about the quality of supervision. In a note dated May 18, 2025 titled What Has Changed Since Silicon Valley Bank Collapsed? Not Much, Peter Coy observed that even two years after the Fed released a 102-page critique of its own supervisory lapses, the fundamental problems that caused the crisis still persisted. 

Silicon Valley Bank, Signature Bank, and First Republic Bank, which failed in quick succession in 2023, were characterised by the most problematic combination: too little liquidity and too little capital in the face of substantial interest rate risk. These were in the know of the supervisors.

While overly strict liquidity rules were not taken seriously by the supervisory examination as the same could have constrained lending business, the real vulnerabilities which stemmed from elevated depositor concentration and unchecked interest rate exposures, both of which might ordinarily have been expected to be identified and addressed in time.

More broadly, what is striking is the apparent reluctance among some advanced economies to align with global supervisory standards. Despite experiencing the consequences of weak oversight in the area of liquidity risk management, some jurisdictions including the US, UK, and now parts of Europe have tended to postpone the implementation of the Basel III rules for the trading book (FRTB). 

Rather than staying aligned in the commitment to strong, risk-sensitive practices that support financial stability, these jurisdictions appear to be moving in tandem toward a more diluted regulatory approach.

Interestingly, the Vice Chair for Supervision at the Federal Reserve has characterised the current rigour of bank examinations in the US as a distraction from the core purpose of supervision, which is to assess financial condition and underlying risks. Among the proposals on the table to improve the quality of supervision in the US are enhanced horizontal reviews, clearer and timelier guidance such as Supervision and Regulation Letters (SR Letters), and a more certain articulation of supervisory expectations. Notably, there is also a proposal to require prospective examiners to complete a challenging course of study and pass a set of rigorous assessments before they can be commissioned for the task of supervision. The underlying idea is that the regulated entities should be able to expect a consistent level of professional expertise among supervisory staff. The emphasis hence is on investing in examiner training today to ensure more effective supervision in the years to come.

Let us now contrast this with the state of supervision in India at this point in time.

The techniques and tools of supervision at the Reserve Bank of India have undergone significant modernisation and have been in practice over the past four to five years. 

Bank and NBFC chief executives often observe, in private conversations, that the nature of questions posed by RBI inspecting officers has evolved in recent years. While these interactions are now more demanding, there is also a growing recognition that such scrutiny is necessary to help institutions navigate increasingly complex financial environments. Both supervisors and the supervised are increasingly getting engaged in the task of strengthening institutional resilience.

One of the key changes has been the shift in inspection philosophy from a retrospective model to what may be described as a “pre-mortem” approach. In place of an annual health check-up, the new supervisory stance gaining ground is an ongoing watch over brewing vulnerabilities across various businesses.

This concept, often articulated in public forums, suggests that institutions should be assessed not just for existing weaknesses but for signals that may indicate future vulnerabilities. The objective is to identify distress at an early stage, so that underlying issues can be addressed before they develop into broader instability or crisis. 

The supervisory message has been to encourage institutions to become more resilient and remain better prepared for future shocks. These ideas have also featured in global supervisory dialogues.

Several institutional reforms have supported this repositioning. The introduction of the Senior Supervisory Manager concept, the establishment of an Off-Site Supervision Wing using SupTech tools, and the preparation of entity-specific risk dossiers have expanded RBI’s ability to monitor institutions in a more holistic manner. 

These dossiers consolidate key indicators to build a 360-degree view of an institution’s strengths, weaknesses, and potential interlinkages. This infrastructure supports forward-looking stress testing, enhanced early warning systems, and more detailed systemic risk assessments, marking a shift from monitoring narrow compliance indicators to a broader assessment of structural risks.

There have been cases where signs of emerging distress were detected by the examination teams early and corrective actions were initiated in time. These outcomes reflect a more granular understanding of financial innovations and risk dynamics. The Enforcement Department has also become more proactive in acting on supervisory findings, with a sharper focus on ensuring follow-through in cases of non-compliance.

At the same time, supervisory culture has begun to shift. Institutions increasingly face engagement that is both deeper and more diagnostic, with an emphasis on understanding business models and their evolving risk profiles. While it is still a work in progress, there is growing awareness within the financial system of the expectations around internal controls and early risk management.

The emphasis on upgrading supervisory talent has also led to the establishment of the College of Supervisors. Designed as a capacity-building platform for Indian and international supervisors, the CoS has been contributing to professional development and knowledge-sharing with special focus on financial resilience. While still a relatively new institution, it reflects a recognition that supervisory challenges require continuous learning and globally informed frameworks.

Nonetheless, it is important to acknowledge the limits of any supervisory architecture. In cases such as PMC Bank and New India Cooperative Bank, (and few other private banks), the failures were traced to internal fraud involving senior leadership. 

When a Chairman of the Board and the CEO act in concert to undermine an institution, it enters the domain of criminality, which falls outside the mandate and expertise of financial supervisors. However, in the public interest, the Reserve Bank has at times stepped in to find workable solutions that reduce harm to depositors, even though such interventions go beyond the typical role of a regulator.

While India was relatively insulated during the global financial crisis of 2008–09, the broader lessons were nonetheless absorbed. Supervisory reforms have since placed greater weight on building resilience, with a view to minimising the probability of distress rather than attempting to eliminate all risk.

In that context, India’s evolving approach to supervision may offer relevant insights to the oversight literature. Even as the global regulators are getting set to re-examine their frameworks, the Indian model could be a welcome reference point. The challenge lies not only in implementing reforms but also in recognising the boundaries of what supervision can achieve. The credibility of any supervisory system rests not just on its tools and processes, but also on its ability to maintain trust, accountability, and institutional agility.