A top Reserve Bank of India (RBI) official has said the time is right for boards of Indian banks to address gaps in governance frameworks, including ensuring appropriate risk management practices and adhering to acceptable customer and market conduct.
RBI Deputy Governor M Rajeshwar Rao, at a conference of directors of state-run and private banks, said that boards should set clear expectations for management and should require reports on risk management on a regular basis.
“Boards should set clear expectations for management in terms of risk management and corporate governance and should require management to report on risk management on a regular basis. This reporting should include information on the bank’s risk appetite, risk exposures, and risk mitigation strategies,” he said.
The speech was uploaded on the central bank’s website.
Citing recent events in the US banking system, Rao shared crucial takeaways for the boards. Boards should ensure that management is transparent about the banks’ financial performance or statements and risk management practices so that trust with stakeholders is built and investors are able to assess the various risks associated with banks, he said.
“Boards should appraise the performance of management objectively and ensure that they are held accountable for their actions. If management is not meeting expectations, Boards should take suitable action, including replacing the management, to improve the bank’s governance and risk management,” he stated.
Meanwhile, RBI Governor Shaktikanta Das, present at the same conference, pointed that the central bank came across instances of some banks trying to conceal the real status of their stressed assets while governance gaps were also noticed at certain lenders.
“During the course of our supervisory process, certain instances of using innovative ways to conceal the real status of stressed loans have also come to our notice,” he said at the Conference of Directors of Banks organised by RBI for private sector lenders in Mumbai.
Das said that despite the guidelines on corporate governance, it was a matter of concern that the RBI has come across gaps in governance of certain banks, with 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,” he stated.