According to Shaktikanta Das, some banks have governance flaws that could lead to volatility

29 May 2023 , 01:09 AM

Governor Shaktikanta Das stated on Monday that the Reserve Bank of India has discovered significant governance deficiencies at several institutions.

According to him, these gaps could lead to some kind of volatility in the financial industry.

While these gaps have been reduced, Das stated in a speech that ‘Boards and the managements must not allow such gaps to creep in.’

The Governor stated that strong governance is the joint duty of the chairman of the board and the directors, including both full-time and non-executive or part-time directors. The Directors must ‘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,’ the chairman continued.

Das urged each director to avoid any conflicts of interest that would impair their independence and objectivity.

According to him, the RBI has occasionally seen that CEOs predominate in board discussions and decision-making. He continued, ‘It has been observed that Boards are not asserting themselves in such circumstances.

The Governor stated that the RBI would not want a situation of this nature to arise.

Furthermore, ‘it is necessary that ‘independent’ directors be truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties,’ Das noted.

The independent director was admonished to ‘always remember that their loyalty is to the bank and no one else.’

Das emphasized the value of public confidence in the financial system by using recent bank failures in the US as examples. He said, ‘This was a classic example of how public confidence in certain banks evaporated overnight.’

Effective corporate governance, he noted, is a crucial component of the financial system’s safety and soundness. According to him, this contributes to the development of a culture of trust, long-term stability, and business honesty among banks.

Das stated that the RBI has greatly improved regulation and oversight of the whole financial industry in recent years.

According to Das, the security of depositors’ funds and establishing a strong financial system are top priorities for the RBI. He also stressed that it is the duty of bank management and boards of directors to prioritize the interests of depositors.

According to Das, the Senior Management is in charge of giving the Board relevant information in a ‘timely, accurate and understandable manner’ so that the Boards may make decisions with confidence.

However, ‘our supervisory evaluations have shown that, at times, the information being presented to the Board was replete with holes and significant inaccuracies. Additionally, the Boards’ assessment of the agenda notes failed to include all pertinent material, which rendered it ineffective or only partially successful, he pointed out.

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