RBI Guv says gaps noticed in banks' governance

The Reserve Bank of India (RBI) has come across governance gaps in some banks, which have the potential to cause some degree of volatility in the banking sector, Governor Shaktikanta Das said on Monday.

"While these gaps have been mitigated, it is necessary that Boards and the management do not allow such gaps to creep in,” Das said while addressing a conference of directors of banks organised by the RBI.

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The RBI Governor flagged that over-aggressive growth, under-pricing or over-pricing of products both on the credit and deposit sides, concentration or lack of adequate diversification in deposit/credit profile can expose the banks to higher risks and vulnerabilities.

Governance gaps are seen as the key reasons for the recent banking sector stresses in the US and Europe. Silicon Valley Bank and Signature Bank, two major regional banks in the US, failed in March this year. The banking stress triggered by the collapse of Silicon Valley Bank and Signature Bank also spread to Europe leading to near collapse of Credit Suisse, which was considered one of the 30 global systemically important banks. Credit Suisse has been taken over by its erstwhile rival Swiss bank UBS.

Referring to the US banking crisis, the RBI Governor asked the boards of Indian banks to pay specific attention to the asset liability management (ALM). “Suboptimal ALM can lead to serious liquidity risks and destabilising effects on the Bank itself. The recent developments in the banking sector in the USA bear ample testimony to this,” he said.

The Governor noted that ensuring robust governance in a bank is the joint responsibility of the chairman of the board and the directors, both whole time as well as non-executive or part time directors.

Das said, “From time to time, the RBI has engaged with certain banks on the need to make suitable adjustments in their business strategies where it was observed that over-aggressive growth in certain business segments (be it in credit or deposits) were creating avoidable vulnerabilities.”

“Problems or risks can come from one corner of the balance sheet which might appear insignificant in the beginning,” he added.

However, Das noted that the Indian banking system is “strong and stable” with Capital to Risk (Weighted) Assets Ratio (CRAR), which measures that ability of banks to absorb losses standing at 16.1%; gross NPA (non-performing assets) at 4.41 per cent, net NPA at 1.16 per cent and Provision Coverage Ratio at 73.20 per cent at the end of December 2022.

“It is in times such as these that complacency may set in. We have to bear in mind that risks often get overlooked or forgotten when things are going well,” the RBI Governor said.