RBI to rationalise the number of agenda items bank management places before its board: Guv Das

The Reserve Bank of India (RBI) will rationalise the number of agenda items the management of a commercial bank placed before its board of directors.

“Many of the items are included in the agenda at the instance of the central bank, but over a period of time, the list appears to have become too long. So, we want to streamline that process and cut out whatever agenda items are not necessary or club together certain aspects which we would like the bank to keep the board informed,” Governor Shaktikanta Das said at the Second Global Conference on Financial Resilience, organised by the College of Supervisors, RBI.

This exercise is currently on, he said.

Das emphasised that the bank management will place all other agenda items as per its own business and organisational requirements. “But there are certain mandatory items which are prescribed by the Reserve Bank. We want to rationalise them and perhaps reduce their size and make them more focused....And I think within a month, we should be coming out with the required guidelines in this regard,” he said.

• Also read: RBI optimistic of 7.3% GDP growth in Q1FY25

Effective governance

Das observed that effective governance among entities in the financial sector entails establishing clear roles and responsibilities for the board of directors and the executive management. Both of them should possess necessary expertise and independence to take the right decisions and to effectively exercise appropriate oversight on operations, he added.

Das emphasised that regular internal and external audits play a critical role in detecting and mitigating potential risks before they escalate into significant issues, as they provide independent assessments of the organisation’s financial health.

“They also facilitate genuine compliance with regulatory requirements. Perfunctory compliance with regulations would actually be self-defeating. At the systemic level, there has been significant improvement in compliance culture in our financial system,” he said.

The RBI is bilaterally engaged with the outlier entities wherever it notices deficiencies.

• Also read: Q1 GDP tends to record some loss of momentum relative to other quarters since pandemic onset: RBI Bulletin

Ethics is key

According to Das, the heads of risk management, internal audit and compliance functions are the conscience keepers of a financial institution. So, they should have the necessary seniority and independence within the organisation.

These verticals in a bank or NBFC play a critical role in identifying the gaps and weaknesses, if any, in their organisations and help manage risks and safeguard the institution and its reputation.

He highlighted the importance of ethics in governance which involves compliance with laws and regulations, both in letter and spirit; pursuit of sustainable business practices; and avoidance of mindless pursuit of bottom lines.

Vigilant to risks

Das observed that both regulated entities and supervisors need to be vigilant to risks, if any, in the business models of organisations.

“While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent. Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks. Robust risk mitigants are essential for ensuring long-term success and resilience of a regulated entity as well as the overall financial system,” he said.

Das said the RBI has significantly strengthened its supervisory systems, transitioning beyond an entity-focused approach to a more thematic and activity-based approach.

“We now look at sustainability of business models of banks and NBFCs. Root-cause analysis of problems and vulnerabilities are undertaken. Advance action is initiated wherever we notice or smell a crisis,” he said.