RBI Governor Speaks On Governance Gaps Found In Banks, Warns Of Volatility

Governor Shaktikanta Das of the Reserve Bank of India (RBI) stated on Monday that the RBI has identified governance gaps in certain banks, which have the potential to cause some degree of volatility in the banking sector. 

"While these gaps have been mitigated, it is necessary that Boards and the managements do not allow such gaps to creep in," Das said during a speech. 

Das emphasised that it is the joint responsibility of the Chairman of the Board and the Directors, including both full-time and part-time Directors, to ensure robust governance. He added, "It is of utmost importance that the Directors keep themselves updated with material changes in the bank’s internal environment as well as the external factors that have a bearing on the bank." 

Regarding conflicts of interest, Das reminded individual directors that they should not have any conflicts that may hamper their objectivity and independence. 

The RBI has noticed instances where CEOs dominate board discussions and decision-making, and in such cases, the Boards are not asserting themselves, Das mentioned. He asserted that the RBI would not like this situation to develop. 

Furthermore, Das highlighted the importance of independence for "independent" directors, stating, "It is necessary that 'independent' directors are truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties." He urged independent directors to always remember that their loyalty should be to the bank and no one else. 

Regarding public trust in the banking system, Das cited recent bank failures in the US, noting, "This was a classic case wherein public trust in certain banks evaporated suddenly." 

Das emphasised that effective corporate governance is crucial for the safety and soundness of the banking system, as it helps build an environment of trust, long-term stability, and business integrity. 

The RBI has significantly strengthened regulation and supervision in the entire financial sector in recent years, Das noted. 

Das stated that the protection of depositors' money and ensuring a robust financial sector for the country's progress are the RBI's priority. He added that it is the responsibility of Boards of Directors and managements of banks to keep the interest of depositors uppermost in their minds. 

Das mentioned that the senior management is responsible for providing material information to the Board in a "timely, accurate, and understandable manner" to enable informed decisions. However, he observed, "our supervisory assessments have revealed that, sometimes, the information being put up to the Board was laden with gaps and material inaccuracies. Further, the agenda notes which the Boards were reviewing did not capture all the relevant information which made their review either ineffective or partially effective." 

The Governor's speech spelt out a 10-point charter for Indian banks to take note of. The areas he covered included: 

1. Governance and Stability 

2. Ensuring requisite qualification and expertise in the Board 

3. Objective and Independent Board 

4. Role of Chairperson, Board Committees and Managing Director/Chief Executive Officer 

5. Tone from the Top; Corporate Culture and Value System 

6. Quality of Information 

7. Effective oversight of Senior Management 

8. Business Model and Conduct 

9. Integrity and Transparency of Financial Statements 

10. Independence of Assurance Functions; risk management, compliance and internal audit