RBI Governor Shaktikanta Das warned on Monday that the banking regulator had found loopholes in the governance of certain banks that could potentially lead to some volatility in the banking sector.
This happened despite the guidelines on corporate governance in banks issued by the RBI, according to Das.
The Reserve Bank had issued guidelines listing seven critical issues for discussion at board meetings. These topics are business strategy, financial reporting and its integrity, risk, compliance, client protection, financial inclusion and human resources. The Reserve Bank has also issued guidelines for appointing the chairman and conducting board meetings; composition of important committees of the executive board; age, tenure and remuneration of directors; and appointment of the executive directors.
“However, there is concern that despite these corporate governance guidelines, we have encountered gaps in the governance of certain banks that have the potential to lead to some degree of volatility in the banking sector,” the RBI governor said at the Press Conference Bank Directors Conference in Mumbai.
Although these gaps have been mitigated, it is necessary that boards and management do not allow such gaps to creep in, Das says.
“We have discussed these issues with some of you on an individual level, but I thought it would be more effective if we addressed all directors together. It is the shared responsibility of the chief executive and directors.” “We hire both full-time and non-executive or part-time directors to ensure sound governance in the banks,” says the RBI chief.
According to the Basel Committee on Banking Supervision, “the quality of governance and management is probably the most important element in the successful operation of a financial institution”. Similarly, a study conducted by Reserve Bank researchers, based on extensive econometric analysis, has shown that bank stability is highly dependent on the governance structure in the banking system.
“Today, our banking sector stands out as strong and stable with a CRAR of 16.1 percent, a gross NPA of 4.41 percent, a net NPA of 1.16 percent and a provision coverage ratio of 73.20 percent at the end of December 2022 out. It’s the right time.” “Things like this can lead to complacency,” says Das.
“We have to remember that risks are often overlooked or forgotten when things are going well. Therefore, bank boards and their executives should be constantly alert to external risks and the emergence of internal vulnerabilities, if any.” he adds.
The safety and soundness of the banking system critically depends on effective corporate governance, which helps build an environment of trust, long-term stability and business integrity for banks, Das said.
“Governance frameworks can be pictured as a complex web of nuts and bolts that hold the financial pillars of capital, assets, deposits and investments in place and maintain the structure of the bank. Raising financial resources would not be an obstacle for banks with robust governance frameworks, as they can earn a governance premium,” he says, adding that that premium in turn depends on the quality of leadership at the top.
