RBI governor warns banks against corporate governance gaps

Reserve Bank of India (RBI) governor Shaktikanta Das on Monday said the regulator has found gaps in the governance standards at some banks.

These anomalies have come up despite RBI issuing guidelines against such practices, Das said, while warning that the gaps have the potential to cause some degree of volatility in the banking sector.

While Das refrained from disclosing the names of the concerned banks, he assured that proactive measures have been implemented to mitigate such practices.

Das, while addressing a conference of the directors of the boards of banks in Mumbai, also emphasized the critical role of bank boards and management teams in pre-empting and preventing such issues, underlining their responsibility in upholding sound asset liability management (ALM) practices.

While RBI has been engaging with some banks individually on these issues, Das said he believed engaging with all directors collectively would be more effective.

Das also warned banks against pursuing “over-aggressive growth in credit and deposits”, while pointing out how suboptimal asset liability management leads to serious liquidity risks and has the potential to destabilize the bank itself.

Drawing parallels with the US, Das said that since March, an increase in interest rates in the US has resulted in a drop in the market value of Treasury bonds and government-backed mortgage securities held by regional banks.

High levels of uninsured deposits and lax supervision by the US Federal Reserve led to serious troubles at three banks—Silicon Valley Bank (SVB), a well-known lender to tech start-ups in the San Francisco Bay area; Signature Bank, and First Republic Bank (FRB).

These banks held collected assets worth $532 billion and were closed by US regulators.

The developments in the US have showed how aggressive growth strategies with disproportionate or excessive focus on the bottom lines and market capitalization often lead to a build-up of vulnerabilities, he said.

Das emphasized that banks should exercise caution and prudence in their growth strategies, pricing of products, and portfolio composition.

Listing potential loopholes in banking strategy, Das said that over-aggressive growth, underpricing or overpricing of products on the credit and deposit sides, concentration, or lack of adequate deposit/credit profile diversification can expose the banks to higher risks and vulnerabilities.

Das said RBI does not interfere in the commercial decision-making of banks but encourages them to address potential risks and vulnerabilities.

Das also appealed to banks to implement robust risk management policies and practices to address the risks associated with their business strategy.

Denying any imminent threat to the banking sector, Das said the Indian banking sector stands strong and stable.

Meanwhile, in its annual report released on Tuesday, RBI said the Indian economy showed robust resilience in FY23 amid a global turmoil in the wake of the war in Ukraine, and posted a growth of 7%, the highest among major economies in the world.

The growth momentum is likely to sustain this fiscal year as inflationary pressures ease amid “sound macroeconomic policies, softer commodity prices, a robust financial sector, a healthy corporate sector, continued fiscal policy thrust on quality of government expenditure, and new growth opportunities stemming from global realignment of supply chains”, RBI said.