Bank boards must ensure that the business model, strategy, and operations are sustainable and create long-term value for all stakeholders, according to RBI Deputy Governor M.K. Jain.

“Effective risk management, governance, and compliance practices are essential to safeguard the bank’s reputation, financial stability, and long-term viability.

“...the board must remain vigilant, adaptive, and continuously assess the bank’s performance, risks, and opportunities, and take timely and informed decisions,” Jain said in a recent speech delivered at the conference of directors of banks.

The Deputy Governor reiterated that the role of the board of directors in ensuring sustainable growth and stability of the banking sector cannot be overstated.

As custodians of the interests of various stakeholders, including depositors, shareholders, regulators, and the wider society, boards must adopt a proactive and strategic approach.

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To prepare for the future, Jain observed that Indian banks will need to focus on digital transformation, enhance customer experience, adopt innovative technologies such as AI and blockchain, invest in cybersecurity measures, look for opportunities to derive synergistic benefits through collaboration with other players, as well as upskill their workforce to meet the demands of the digital era.

Additionally, they will need to prioritise risk management, regulatory compliance, and sustainability to ensure long-term resilience and competitiveness in the evolving banking landscape.

Supervision: neither intrusive nor punitive

The Deputy Governor noted that supervisors often detect serious issues such as non-compliance, divergences from IRACP (income recognition, asset classification and provisioning) norms, and gaps in internal controls and IT systems during their limited time at the bank.

However, it is reported that these concerns frequently surprise directors when presented in risk assessment and off-site analytical reports.

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“Boards should reflect on why critical deficiencies go unnoticed despite having access to relevant data and assessments, and work on building internal capabilities to identify and address such issues at an early stage,” Jain said.

Referring to supervision sometimes being viewed as intrusive, he clarified that supervision is neither designed to be intrusive or punitive, nor are supervisors the risk managers of supervised entities.

“It should be appreciated that supervision is only the fifth line of defence in banking, as it serves as an additional layer of oversight beyond the traditional three lines of defence model (business operations, risk management and compliance, and internal audit) and the fourth line of defence (external audit). Supervision is forced to step in only when these lines fail,” he said.