Found Gaps In Corporate Governance At Banks Despite Guidelines: RBI Governor

Mumbai:

The Reserve Financial institution has discovered gaps in banks’ company governance regardless of issuing pointers on the matter, Governor Shaktikanta Das mentioned on Monday.

Addressing administrators of financial institution boards, Mr Das mentioned such gaps, which have been mitigated, might have brought about “some extent of volatility”.

He additionally hit out strongly in opposition to “good accounting” to hide stress and bloat monetary efficiency.

“It’s…a matter of concern that regardless of these pointers on company governance, we’ve got come throughout gaps in governance of sure banks, with the potential to trigger some extent of volatility within the banking sector,” Mr Das mentioned on the assembly specifically convened by the Reserve Financial institution.

Financial institution boards and administration mustn’t permit such gaps to creep in, he mentioned, including that the RBI has taken up such issues with the banks at a person stage previously.

It’s the joint accountability of the chairman of the board and the administrators, each whole-time and non-executive or part-time administrators, to make sure sturdy governance in banks, the governor famous.

The RBI has additionally discovered banks adopting “good accounting strategies” to “artificially increase monetary efficiency”, Mr Das mentioned, revealing extra in regards to the modus operandi.

Banks attempt to conceal the actual standing of careworn loans by getting two lenders collectively to evergreen one another’s loans by sale and buyback of loans or debt devices, persuading good debtors to enter into structured offers with a careworn borrower to hide the stress, modify borrower’s compensation obligations through the use of inner or workplace accounts, he mentioned.

“We have now additionally come throughout a couple of examples the place one methodology of evergreening, after being identified by the regulator, was changed by one other methodology. Such practices beg the query as to whose curiosity such good strategies serve. I’ve talked about these cases to sensitise all of you to maintain a watch on such practices,” he mentioned.

With out naming any specific case, Das mentioned the RBI has observed the dominance of chief executives in board discussions and decision-making and rued that the boards don’t assert themselves.

“We might not like any such state of affairs to develop. On the identical time, there shouldn’t be a state of affairs the place the CEO is inhibited from doing his duties,” he added.

Mr Das suggested banks to be cautious within the pursuit of their development methods, pricing and portfolio composition.

“Over-aggressive development, under-pricing or over-pricing of merchandise each on the credit score and deposit sides, focus or lack of enough diversification in deposit/ credit score profile can expose the banks to larger dangers and vulnerabilities,” he mentioned.

The governor additionally mentioned that whereas the Reserve Financial institution has nudged banks to regulate their enterprise methods in some circumstances the place they have been creating “avoidable vulnerabilities” by being aggressive, the central financial institution doesn’t intervene within the industrial decision-making of the banks.

Staff can’t be rewarded for growing short-term earnings with out enough recognition of the dangers and long-term penalties, Mr Das mentioned.

Within the remarks that come weeks after turbulence within the American banking sector, Mr Das additionally requested financial institution boards to be cautious about primary facets like asset-liability mismatches, saying as suboptimal ALM can result in critical liquidity dangers and destabilising results on the financial institution itself.

“…developments within the USA have additionally demonstrated that aggressive development methods with disproportionate or extreme deal with the underside strains and/or market capitalisation usually results in construct up of vulnerabilities,” he mentioned.

He was fast so as to add that the Indian banking sector is “robust and secure” with capital buffers at 16.1 per cent, gross non-performing property at 4.41 per cent and provision protection ratio at 73.20 per cent on the finish of December 2022.

“It’s in instances comparable to these that complacency might set in. We have now to remember that dangers usually get ignored or forgotten when issues are going nicely. Due to this fact, boards of administrators of banks and their senior administration ought to preserve a continuing vigil on exterior dangers and build-up of inner vulnerabilities, if any,” he mentioned. In the meantime, the RBI in an announcement mentioned that the governor acknowledged the position performed by the banks in supporting the financial system and sustaining resilience, together with improved monetary efficiency within the face of a number of antagonistic shocks in latest instances.

He exhorted the administrators of banks to additional strengthen the governance and assurance capabilities (danger administration, compliance and inner audit) in order that the banks are in a position to determine and mitigate dangers at an early stage.

The governor additionally emphasised the necessity for banks to make sure continued monetary and operational resilience, the assertion mentioned.

Deputy governors MK Jain and M Rajeshwar Rao, together with govt administrators — representing the RBI’s Division of Supervision, Division of Regulation and Enforcement Division, and different senior officers, additionally participated within the convention. 

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