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RBI: Boards must steer banks not individuals

MUMBAI: The Reserve Bank of India (RBI) has said that banks and financial institutions should not be dominated by individuals. Rather, the central bank said, they should be board-driven to avoid undesirable consequences. It has also highlighted specific questions that boards should ask managements.
The issue of the role of the boards was raised by deputy governor M K Jain in a speech earlier this month. The speech, released by the RBI on Tuesday, raises the issue of governance and the role of the board. Jain said that the directors need to question whether the bank’s strategic plans are realistic, whether it has sufficient capital to support its risk profile, whether the bank’s business risk-taking is in alignment with the approved risk appetite. Jain also said that boards must ask banks whether the earnings are from the implementation of planned bank strategies or transactions generating short-term earnings.
Earlier, the RBI has had to step in to rescue two major private banks that were individual-driven. In 2004, the RBI had to intervene when Global Trust Bank promoted by Ramesh Gelli collapsed. More recently in March 2020, the RBI had to step in and place Yes Bank, promoted by veteran banker Rana Kapoor under a moratorium to prevent the bank from failing. Since then, the RBI has decided to cap the tenure of bank CEOs.
Recently, the RBI appointed a senior official as an additional director on the board of RBL Bank, following which the bank’s MD Vishwavir Ahuja went on leave. “The governance framework surrounding the individual players in the financial system assumes a central role not only in terms of value creation for various stakeholders but also in ensuring the oversight of the board on risk appetite and risk culture of individual institutions,” said Jain.
According to Jain, there are three levels of defence in a bank. The first is the business functions which are the risk-takers and the owners of the risk. The second levels are the risk management functions and the compliance functions in the bank which have the responsibility of exercising oversight over the business departments. “The internal audit functions as the third level of defence and has the responsibility of identifying gaps from prescribed requirements and report them to the board or the audit committee of the board,” said Jain.

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