Effective governance is the foundational bedrock of cooperative banks in India, Reserve Bank of India (RBI) deputy governor (DG) Swaminathan J said in a speech at the conference of governance in urban co-operative banks (UCBs) in Hyderabad.
Extending loans to connected parties such as relatives of directors and senior management are not in consonance with statutes, regulations and good governance practices, and should be avoided, he said.
Pointing to the failure of a Gujarat-based UCB in 2001 and more recently fraud at a Mumbai-based bank, the DG said the need for robust governance mechanisms at UCBs is even more pronounced due to their unique position as community-centric entities.
“Transparent decision-making, accountability and adherence to best practices are paramount. Only boards whose members meet the standard of fit and proper in terms of age, relevant qualifications, experience and a proven clean track record along with the right aptitude will be in a position to deliver the desired results,” he said.
The RBI DG said all directors on the board of UCBs must have “a basic understanding” of a bank’s financial statement.
He urged directors to carefully review auditor’s report and ascertain if it is “qualified or clean”, engage with auditors on best practises, and continuously monitor whether there is a build up of concentration in loan portfolio and diversify risk while closely monitoring all large exposures of the UCB.
UCBs must also strive to have a comprehensive fraud detection mechanism in place and immediately report frauds to the RBI and legal authorities. They must also leverage technology to stay competitive and enhance human resources by training programmes on building both technical and soft skills.
“At times our supervisory medicines may taste bitter. However, prevention is always better than cure. I would like to assure you that the RBI has the best interests of the sector in mind, consistent with the duty cast upon it to safeguard the interests of depositors while fostering a resilient, sound, and stable financial system that contributes to the nation’s development,” the DG said.