The Reserve Bank has found gaps in banks’ corporate governance despite issuing pointers on the matter, Governor Shaktikanta Das stated on Monday.
Addressing administrators of financial institution boards, Das stated such gaps, which have been mitigated, may have brought on “a point of volatility”.
He additionally hit out strongly towards “sensible accounting” to hide stress and bloat monetary efficiency.
“It is…a matter of concern that despite these pointers on corporate governance, we now have come throughout gaps in governance of sure banks, with the potential to trigger a point of volatility in the banking sector,” Das stated at the assembly specifically convened by the Reserve Bank.
Bank boards and administration mustn’t permit such gaps to creep in, he stated, including that the RBI has taken up such issues with the banks at a person degree in the previous.
It is the joint duty 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 found banks adopting “sensible accounting strategies” to “artificially increase monetary efficiency”, Das stated, revealing extra concerning the modus operandi.
Banks attempt to conceal the actual standing of confused 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 confused borrower to hide the stress, alter borrower’s compensation obligations through the use of inner or workplace accounts, he stated.
“We have additionally come throughout a number 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 sensible strategies serve.
“I’ve talked about these cases to sensitise all of you to maintain a watch on such practices,” he stated.
Without naming any explicit case, Das stated 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 wouldn’t like one of these state of affairs to develop.
“At the identical time, there shouldn’t be a state of affairs the place the CEO is inhibited from doing his duties,” he added.
Das suggested banks to be cautious in the pursuit of their progress methods, pricing and portfolio composition.
“Over-aggressive progress, 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 stated.
The governor additionally stated that whereas the Reserve Bank has nudged banks to regulate their enterprise methods in some instances the place they had been creating “avoidable vulnerabilities” by being aggressive, the central financial institution doesn’t intrude in the business decision-making of the banks.
Employees can’t be rewarded for growing short-term income with out enough recognition of the dangers and long-term penalties, Das stated.
In the remarks that come weeks after turbulence in the American banking sector, Das additionally requested financial institution boards to be cautious about fundamental points like asset-liability mismatches, saying as suboptimal ALM can result in critical liquidity dangers and destabilising results on the financial institution itself.
“…developments in the USA have additionally demonstrated that aggressive progress methods with disproportionate or extreme deal with the underside strains and/or market capitalisation usually results in construct up of vulnerabilities,” he stated.
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 at the tip of December 2022.
“It is in occasions comparable to these that complacency might set in.
“We need to bear in thoughts that dangers usually get ignored or forgotten when issues are going effectively.
“Therefore, boards of administrators of banks and their senior administration ought to keep a relentless vigil on exterior dangers and build-up of inner vulnerabilities, if any,” he stated.
