Banks must have robust governance policies and processes: RBI

The Reserve Bank of India said it is imperative that banks have robust governance policies and processes commensurate with their risk profile and systemic importance.

The governance policies and processes should encompass strategic direction, group and organisational structure, control environment, responsibilities of the Boards and Senior Management.

The Boards have the responsibility of approving and overseeing implementation of the bank’s strategic plan; risk appetite and related policies; establishing and communicating corporate culture and values; and laying down policy related to conflict of interest and a strong control environment, the central bank said in its latest annual report.

“During the supervisory assessment, the above aspects and implementation of policies are examined. These cover availability of adequate number of Board members with appropriate skills and expertise and effective conduct of Board meetings in accordance with laid down policies, among other aspects.

“Sound governance practices in PSBs (public sector banks) and PVBs (private sector banks) help in providing confidence to various stakeholders, particularly the depositors who do not have a say in the banks’ business decisions,” per the report.

The central bank emphasised that this requires deeper involvement of the boards of banks in strategic issues and risk oversight.

Focus area

The central banks observed that one of the focus areas in recent years has been to strengthen governance practices within the SEs (supervised entities).

This aspect is not only examined during the onsite supervisory process but is also emphasised through continuous engagements with the SEs in the form of conferences and meetings with the Board/Senior Management, and through offsite system level assessments, it added.

It emphasised that banks, as the most significant providers of credit, differ from other entities as their collapse has wider ramifications for depositors, institutions, and the financial system itself. This makes it imperative to subject banks to specific regulations and close monitoring.

The central bank said banks are expected to have proper policies in place and suitable internal controls so that the governance structure is well implemented as they act as fulcrum to the financial structure and the economy.