The banking sector needs to address gaps in the governance frameworks and assurance functions, in a bid to gear up to meet future challenges, RBI deputy governor M Rajeshwar Rao said.
“As the saying goes, the time to fix the roof is while the sun is shining. The banking sector in India at this juncture is sound, resilient, and financially healthy.
So, the time is perhaps right to improve the plumbing by addressing the gaps in governance frameworks, assurance functions and strategise for better times ahead,” Rao said in his address to top the management of private and state-owned banks last month.
The recent crises in the US banking system have highlighted that the boards of banks should set clear expectations from the management on risk management and corporate governance standards, and should take severe actions, including replacing officials, if the performance is found unsatisfactory, he said.
“Boards should appraise the performance of management objectively and ensure that they are held accountable for their actions. If management is not meeting expectations, boards should take suitable action, including replacing the management, to improve the governance and risk management,” Rao said.
The overseas crises have also taught that boards must ensure that the management is transparent about the banks’ financial performance and risk management practices, so that trust with stakeholders is maintained, he said.
“Boards must ensure a suitable policy framework for its own assessment for effectiveness, in accordance with their strategies and risk profiles. The effectiveness must be tracked at all levels – individual director, committee and overall board,” Rao said, adding that a well-qualified, engaged, and vigilant board can prevent management failures.
His comments are in-line with RBI governor Shaktikanta Das’s views. During the first-of-its-kind meeting with senior bankers in Delhi and Mumbai, Das said despite guidelines on corporate governance, these gaps found in certain banks have the potential to create some level of volatility in the banking sector.