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Pointing out that both bank managements and boards had become cozy in their roles, RBI Governor Shaktikanta Das underscored the active role of boards, especially in challenging the proposals of the management.
Banks should ensure that their business models and business strategies are conscious choices, after a robust strategic discussion in the board, instead of being a mechanical ‘follow the market’ approach, Das said at the SBI’s Banking and Economics Conclave here on Tuesday.
Growth strategies
The Reserve Bank chief emphasised that in their endeavour to grow, banks should avoid the herd mentality and look for differentiated business strategies.
He said the RBI has started taking a close look at the business models and strategies of banks.
“Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors.
“The active role of the board, especially in challenging the proposals of the management, thus becomes critical,” Das said, adding that this will contribute towards a more diligent and balanced approach to decision making.
Das said that the RBI’s intention is not to create a divergence between the board and the management.
The latter has a certain role and the former a certain role. And each is expected to play that role, he said.
Referring to his earlier remark that the board should challenge certain norms, certain risk-taking practices and certain models of the management, Das said this is only to ensure that right decision is taken.
“And the board, which is in charge of oversight of the bank, is expected to play that role as a guide and to discharge its oversight functions in a prudent manner... Let me clarify, we don’t want a fight between the board and the management,” he said.
Responsible governance
The Governor noted that the board carries the responsibility of being the guardian of the trust that depositors have reposed in a bank.
A bank’s responsibility towards depositors should, therefore, be weighed against its responsibility towards shareholders of the bank.
“To ensure good governance, the Reserve Bank has high expectations from the oversight role of the board, its composition, directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests.
“Thus, business priorities need to be complemented with responsible governance and ethical actions,” he said.
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