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Our Bureau

New Delhi , Nov. 10

THE Reserve Bank Governor, Dr Y.V. Reddy, today said that adoption of improved corporate governance practices by banks could lead to easing of the regulatory regime to give greater freedom to the board of directors.

The Governor also suggested that banks should evolve their own "early warning indicators" to monitor and manage risks more efficiently.

"Improved corporate governance practice would also provide an opportunity to accord greater freedom to the banks' boards and (allow the RBI) to move away from micro regulation to macro management," Dr Reddy said in his keynote address at the BanCon 2004.

The first edition of the Bankers' Conference is being jointly organised by Punjab National Bank and the Indian Banks' Association.

Admitting that there was no `optimal' level of governance for one to be satisfied with, Dr Reddy said that the objective should be to continuously strive for excellence.

"Popular sentiments relating to governance in banks need to be on the top of the agenda," he told the gathering of the country's top bankers.

On the need for better risk management, the Governor said that the implementation of Basel II accord would highlight the need to focus more on risk-management and risk-measurement.

"The institution of sound risk management practices would be an important pillar for staying ahead of the competition. Banks can, on their part, formulate `early warning indicators' suited to their own requirements, business profile and risk appetite in order to better monitor and manage risks," he said.

Dr Reddy said that containment of costs, recovery management and higher level of adoption of information technology were key to the viability and stability of the banking system. Providing figures on operating costs of banks in some major countries, Dr Reddy pointed out that in 2003 while the operating costs as a proportion of total average assets in India was 2.24 per cent, it was 2.12 per cent in UK, 2.03 per cent in Switzerland while it was less than 2 per cent in European economies such as Sweden, Austria, Germany and France. "The tasks ahead are thus clear and within reach," he said.

The RBI Governor said that though Indian banks have done "a remarkable job" in containment of non-performing assets (NPAs), there was still a distance to cover. "Recovery management is the key to sustainability of bank profits as well as their long-term viability," he said.

Dr Reddy felt that recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks.

He, however, admitted that Indian banks had done laudable work in reducing their NPA burden over the years by containing NPA to 2.9 per cent. "Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment."

On the technology front, Dr Reddy lamented that despite India being a global leader in information technology, the use of technology by banks has been "somewhat muted" and that banks needed to do significant `catching up' in this respect.

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