The Reserve Bank of India (RBI) has overhauled the governance framework for bank boards, turning the focus to strategy and risk governance instead of only adherence to a regulatory checklist. Kshipra Petkar explains the key changes and what they mean for banks
l What changes for bank boards?
THE BANKING REGULATOR last week issued revised governance directions that replace the earlier framework with a principles-based approach aimed at enabling bank boards to use their time more effectively and focus on strategy, risk governance and oversight. Under the earlier governance framework, boards were expected to deliberate on seven broad themes covering areas such as business strategy, risk, compliance, financial reporting and integrity, customer protection, financial inclusion and human resources. While these themes were intended to ensure comprehensive oversight, the RBI felt they had become largely prescriptive.
The amended directions replace these broad themes with principle-based guidance, allowing boards to formulate their agendas based on the specific priorities and business models of individual banks. At the same time, the RBI has consolidated all matters that continue to require board approval, review or information in dedicated appendices, while discontinuing the mandatory requirement to place several routine operational matters before boards.
l Why did RBI make this shift?
ACCORDING TO THE RBI, the objective is to improve the quality of board discussions rather than reduce regulatory oversight. In the feedback statement accompanying the final directions, the central bank clarified that removing the seven themes “is not meant to dilute regulation or weaken Board oversight.” Instead, it said the principle-based approach gives boards the flexibility to formulate agendas based on their own priorities while ensuring greater focus on strategy and risk governance.
The revised framework also requires boards to clearly identify matters reserved for their approval or reporting and ensure sufficient time is devoted to strategy and risk governance, reinforcing that accountability continues to rest with the board even as operational flexibility increases.
The revised norms will come into effect from October 1.
l Were stakeholder views incorporated?
THE RBI ACCEPTED industry feedback to remove the requirement for boards to define what constitutes a “material amendment” to policies before delegating their review. It also modified provisions relating to delegation of responsibilities and extended the implementation timeline by a month. However, it rejected suggestions to retain the seven broad governance themes, mandatory Action Taken Reports and the requirement to periodically place regulatory developments before the board. It maintained that boards should have the flexibility to decide their own mechanisms for monitoring implementation of decisions, while keeping directors informed of regulatory changes should remain the responsibility of compliance and secretarial functions. RBI also retained the provision making the chairperson primarily responsible for setting the board agenda.
l What still needs board approval
CAPITAL PLANS, APPOINTMENT or reappointment of managing director and chief executive officer, undertaking any form of business through more than one entity in the group, customer service aspects, among others will continue to be placed before the board for approval.
l What can the board delegate?
ROUTINE MATTERS SUCH as annual audit plans, risk-based internal audit methodology, review of cyber security risks, review of fraud risk incidents, business correspondent model, investment portfolio, among others can be delegated to the board committees.
l How do experts see the changes?
EXPERTS VIEW THE move as a shift from process-oriented supervision to outcome-oriented governance. They say the framework gives boards greater flexibility to devote time to institution-specific strategic issues rather than spending meetings on routine compliance matters.
At the same time, experts caution that the revised framework raises the bar on board accountability. Without a prescribed agenda, directors will need to exercise greater judgement in deciding which issues merit board attention. This could lead to more meaningful discussions at well-governed institutions but also places greater responsibility on independent directors and board chairs to ensure critical risks are not overlooked.
Some governance professionals also point out that a principle-based framework may make it harder for investors and proxy advisory firms to benchmark governance practices across banks, as agendas may increasingly differ from one institution to another. Ultimately, they argue, the effectiveness of the new framework will depend less on regulation and more on the quality, independence and maturity of individual bank boards.
