The Reserve Bank of India (RBI) has often been criticised for what some perceive as micromanagement of the country’s banking sector. It is important to acknowledge that RBI does not micro-manage, but it does play a vital role in ensuring the stability and integrity of the financial system. While it may seem like the RBI’s interventions are excessive at times, they are a necessary response to a problem that has plagued the banking industry for years – the lack of proactiveness and accountability in Bank Boards.

Consumer Protection and Ethical Standards

Bank boards are expected to uphold the highest standards of consumer protection and ethical conduct. However, in practice, we often witness deviations from these principles. RBI’s periodic reminders are a stern call to action, reminding banks that their primary responsibility is not just profitability but also the well-being of their customers. The recent incidents of mis-selling and unfair practices in the banking industry only reinforce the need for a vigilant regulator. The RBI has started penalising its errant regulated entities, with fines more than it just to levy. But unless these fines are docked from the capital adequacy calculation, it won’t hurt the business sentiment or alter behaviour.

Risk Management and Growth Projections

Banks, driven by the pursuit of profit, tend to be overly optimistic in their growth projections and, in some cases, neglect prudent risk management. The RBI’s admonitions on this matter are crucial in preventing financial instability and crises. Banks need to be pragmatic about assessing risk and developing comprehensive risk management strategies, instead of solely chasing ambitious growth targets. The RBI, in the recent few months, has cautioned many of the banks, to slow down their growth targets, and to focus on risk mitigation. It has also stopped banks and NBFCs, whose digital framework have posed a risk by itself, from onboarding newer customers.

Board Engagement

One of the most critical aspects of a bank’s long-term sustainability is effective succession planning. The RBI’s recent mandate for every bank to have at least two Whole Time Directors, including the bank MD & CEO, is a clear indication of the shortcomings in this area. It only reminds the importance of active Board engagement in succession planning, not just for the top executive, but also for next two levels.

Bank boards, in their critical deliberations, often fail to capture the essence of their discussions in a granular manner in the Board minutes. Transparency is a cornerstone of good corporate governance, and it is disconcerting that in many instances, board members’ dissent or disagreement remains shrouded in ambiguity. This is a glaring shortcoming that even necessitates the intervention of the RBI. A functioning board should encourage open dialogue and robust debate, as it is through such discussions that sound decisions are made.

Bank boards should not just see their board meetings as quarterly regulatory need, but as opportunities for introspection and improvement in their bank. They must recognise their pivotal role in ensuring the financial well-being of the nation and the protection of the consumers they serve. Active engagement in governance, adherence to ethical standards, and a proactive approach to risk management are all part of their duty.

Banks, at times, become so engrossed in their business chase that they lose sight of their fundamental role as socio-economic institutions, where trust serves as the very foundation. It’s in these moments that the RBI’s persistent reminders become a beacon of reason, reiterating that banks are not just profit-driven entities; they are entrusted with the financial well-being of countless individuals and the stability of the entire economy.

The fundamental issue with bank boards lies in their approach and attitude. There is a need for greater commitment of time and energies, and a change in perspective within Bank Boards. The importance of trust cannot be overstated, for it is trust that sustains the delicate equilibrium upon which the entire financial edifice rests, reminding banks of their profound responsibility to society at large.