by: Tajamul Rehman Sofi
As a result of worldwide financial shocks and the increasing oversight from regulatory agencies like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Indian Deposit Insurance Corporation (IRDAI), the Indian banking industry has recently been subject to heightened regulatory scrutiny. The “Practice Makes Perfect” methodology (Ivy Chen, et. al., 2024), which highlights the need of simulated regulatory tests, is a contemporary and vital strategy that worldwide experts are advocating as the industry navigates through economic uncertainty and regulatory difficulties. This article explores the importance of taking a proactive approach to regulatory review, the advantages that go beyond just complying, and the need for a balanced regulatory framework to protect India’s banking sector from potential hazards. Mock tests can help banks get ready for regulatory assessments, and these exams can also help companies get their risk management and goals in line. It is crucial to be well-prepared for regulatory inquiries in today’s ever-changing world due to factors such as geopolitical tensions, fast technical breakthroughs, and macroeconomic swings. In the same way that top banks across the world use practice exams to figure out where they stand and what they need to work on, Indian banks should take the initiative. Banks should assess how well their core risk procedures can adjust to new circumstances before diving into practice tests. To do this, you must check that your controls, internal systems, and procedures for identifying risks are in line with what is required by law and by industry standards.
The value of mock regulatory tests extends well beyond the realm of compliance alone. By acting as triggers for the development of a strong risk culture, they allow financial institutions to spot problems early and fix them before they get worse. If, for example, a practice test reveals inconsistencies or lack of integration across various banking processes, corrective action is required to bring everything up to speed and in line with regulations. Banks can better align with regulators and reduce penalties with mock exams, which also give a chance to rectify shortcomings in advance. In addition, they assess the company’s proficiency in producing high-quality documentation, ensuring adequate preparation, and communicating effectively, all of which are crucial in the modern regulatory environment. Although passing regulatory tests is critical, taking practice exams can help you avoid any surprises. In the Indian context, where the possible downfall of an SBI-like banking behemoth is a real possibility, regular mock exams act as stress testing, revealing weaknesses before they become disastrous. To restore public faith in the financial system and reduce the likelihood of systemic disasters, practice tests promote a mindset of constant development and alertness. Nevertheless, it is critical to recognize the constraints of practice tests and make sure they adapt to new dangers, so people don’t “gamming” the system.
To maintain stability and resilience, countries around the world have started regularly inspecting their banking systems. Horizontal exams are used by regulatory agencies across the globe to promote strong internal audits and best practices by comparing banks to their counterparts. Following a similar path in India is a show of dedication to excellence and stability. Indian banks may strengthen the financial ecosystem as a whole and protect themselves from potential threats in the future by conforming to international norms. Financial organizations that place a premium on proactive risk management are required to undertake two or three mock exams per year. Sectors with upcoming tests, known difficulties, or new leadership will receive their testing priorities. Recent years have seen heightened regulatory scrutiny of India’s banking sector, which is vital to the country’s economy. Although the goal of the regulatory measures is to improve financial stability and safeguard depositors’ interests, they have inadvertently created consequences for the industry. In this light, it becomes clear that conducting practice regulatory tests is a good way to make Indian banks more resistant to regulatory pressures. A solid financial foundation can be built through these simulated activities, which also aid in avoiding unfavorable outcomes and safeguarding reputation.
Striking a balance that stimulates growth and innovation within the sector is crucial, but regulatory actions are significant for ensuring financial stability. Capital consumption has increased due to a dramatic rise in non-performing assets (NPAs) caused by the elimination of regulatory relief for restructured loans. Banks in India have received assistance from the Reserve Bank of India (RBI) due to their involvement during the pandemic. But new stress indicators are popping up in some areas, so we must be on the lookout. New threats to financial stability are emerging because of innovation and technology’s quick pace of development, highlighting the necessity for regulatory flexibility. The significance of practice regulatory tests is underscored by the worldwide financial scene in the early 2020s. Important measures include doing internal audits, comparing results to industry standards, and administering exams that compare banks to their competitors. Regulatory tests enhance resilience against hidden risks, including international best practices, and go beyond simply meeting compliance standards. For success in today’s fast-paced, ever-changing business world, it’s crucial to have a proactive mindset that encourages a culture of continuous growth and awareness.
The banking industry in India is at a crossroads, and one key strategy for stability and quality is to implement mock regulatory tests. To overcome future challenges, it is necessary to have an integrated strategy that considers the specific needs of smaller banks and combines technological innovation with financial inclusion. Indian banks can protect stakeholders’ interests and help the economy thrive by taking the initiative when it comes to regulatory assessment, which will ensure a strong financial future. Proactive risk management must be a top priority for banks in this uncertain environment. The bar for ongoing risk assessment and surveillance will keep climbing. If the Indian banking industry is serious about building resilience and encouraging performance, it must make mock regulatory exams a top priority. To secure India’s financial future, the sector must be strengthened against future threats by an all-encompassing and proactive strategy that is in line with global best practices.
The author is pursuing Ph. D. in Economics from Jamia Millia Islamia, New Delhi. He can be mailed at tajamulsofi.eco@gmail.com
