Reserve Bank of India (RBI) Governor Shaktikanta Das has emphasised the need to avoid the excessive dominance of one or two directors in the functioning of bank boards. He has urged directors to engage in open and frank discussions, and to be proactive in questioning bank operations.
Addressing directors of urban cooperative banks (UCBs), Das noted that the RBI had observed such undue influence even in major commercial banks. When identified, the RBI has advised these banks against such practices. The governor first addressed UCB directors on August 30, 2023, and the video of his remarks was released on Monday.
Das asserted that directors in UCBs, who are elected to their positions, must possess expertise in diverse banking functions, including risk management and information technology.
While the managing director should have the autonomy to act according to their judgement, Das added, it was crucial for directors to seek clarifications on any doubts they might have.
He emphasised that robust governance was pivotal for healthy functioning of banks. Effective governance, he said, was anchored in three pillars — compliance culture, risk management, and internal auditing. Observing regulations is critical, and deviations have been found during RBI monitoring processes, he said.
Das advised that board members should engage in risk analysis on a quarterly basis and cautioned that internal audits should not be treated as mere routine activities; they should be conducted sincerely.
Turning his attention to customer responsibility, Das stressed that protecting depositors' savings was a fundamental obligation for bankers. This is particularly important as the entire banking system operates on deposits collected from small savers, the middle class, and retirees.
He added that it was the RBI's duty to collaborate with all banks to guarantee the safety of depositors' funds. To this end, the central bank continually issues new regulations and supervision guidelines.
Das noted that there had been numerous cases, particularly within the cooperative banking sector, where deposits had been jeopardised due to organisational challenges. In many instances, such as the case of Punjab and Maharashtra Bank, irregularities in management have been the root cause of these issues.
Finally, Das said the RBI had instituted a four-tiered regulatory and supervisory framework for UCBs, aiming to better oversee the more than 1,500 entities making up this sector.