RBI Governor on Upcoming Work on Governance and Compliance Functions

The RBI Governor highlighted that the last few years have been testing times for Indian banks as they grappled with deteriorating asset quality leading to higher provisioning requirements, falling profitability and weak capital position. However, the banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities and improve its financial health. Several initiatives have been undertaken and are also underway to strengthen the regulatory and supervisory frameworks aimed at increasing the resilience of the banking system. He discussed the work done on dealing with stressed assets and on the frameworks for countercyclical capital buffer, liquidity coverage ratio, net stable funding ratio, and non-bank finance companies. Next, he highlighted some important issues that need to be addressed in the coming months, with the first and foremost issue being governance reforms in banks and non-banks, including the following:

• Enhancing the quality and stability of the boards of public-sector banks through further streamlining appointment process, succession planning, and compensation. These aspects could be evaluated by bank boards and reviewed by the Banks Board Bureau.
• Monitoring the performance of MDs/CEOs of both public- and private-sector banks by the Board of Directors, either through a sub-committee or through an external peer group review.
• Establishing an effective performance evaluation system for banks to improve their financial and operating parameters. The Government, the Bank Board Bureau, and the Reserve Bank are engaged in developing an objective framework for performance evaluation of public-sector banks. This should redefine the contours of corporate governance in public-sector banks, with a focus on transparency, accountability, and efficiency.
• Dealing with governance issues in private-sector banks, with these issues mainly relating to incentive structure of their managements, quality of audits and compliance, and efficient functioning of Audit and Risk Management Committees. RBI has proposed the guidelines for compensation in private-sector banks, which cover specification of minimum variable pay component and claw-back arrangements, among others.

Along with risk management, compliance functions in banks is one of the key elements in the corporate governance structure. These have to be adequately strengthened and made sufficiently independent. some incidents in the financial sector have underscored the need for specialization in supervision and regulation. The build-up of risks among regulated entities due to exposure concentrations, non-transparent market practices and the associated contagion effects in the banking sector have significant implications for financial stability. Considering these issues, the Reserve Bank has now decided to build a specialized regulatory and supervisory cadre for regulation and supervision of banks, non-banks and co-operatives. This specialized cadre in the Reserve Bank will play a pivotal role so that sound banking and non-banking sectors efficiently intermediate the financing requirements of the entire economy.

Considering the developments in fintech landscape, RBI is strengthening the surveillance framework and has issued draft guidelines on the Framework for Regulatory Sandbox. RBI will also continue to monitor the activity and performance of the non-bank financial sector, with a focus on major entities and their inter-linkages with other sectors. In conclusion, Mr. Das highlighted that reforms are an ongoing process. RBI will endeavor to be proactive in its approach. In the fast-changing financial landscape, RBI will continue to be watchful to the emerging challenges and respond to them appropriately to ensure a resilient and robust financial system, said Mr. Das.

Related Link: Speech

Keywords: Asia Pacific, India, Banking, Non-Bank Finance, Governance, Internal Controls, Compliance, Operational Risk, RBI