Shaktikanta Das, governor of the Reserve Bank of India (RBI), on Monday said that the Boards of Directors of Banks and their senior management should maintain constant vigil on external risks and build-up of internal vulnerabilities, if any. Das, who was speaking at a conference of directors of banks organised by the RBI for the private sector lenders in Mumbai, said, "Today our banking sector stands out as strong and stable with CRAR at 16.1 per cent, Gross NPA at 4.41 per cent, Net NPA at 1.16 per cent and Provision Coverage Ratio at 73.20 per cent at the end of December 2022. It is in times such as these that complacency may set in. We have to bear in mind that risks often get overlooked or forgotten when things are going well. Therefore, Boards of Directors of Banks and their senior management should maintain constant vigil on external risks and build-up of internal vulnerabilities, if any."
The governor said that the banking regulator has also come across gaps in the governance of some banks, despite it issuing guidelines. "It is necessary that boards and managements do not allow such gaps to creep in.”
The governor highlighted that during central bank’s supervisory process, the RBI found certain instances where innovative ways were used to conceal the real status of stressed loans have also come to our notice. "To mention a few, such methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress," he said.
"We have also come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another method. I have mentioned these instances, Das said, to sensitise all of you to keep a watch on such practices. Such practices beg the question as to whose interest such smart methods serve,” the governor added.
Das also highlighted that individual directors on the boards of banks should not have any conflict of interest which may hamper their objectivity and independence. "It is the responsibility of the Board to ensure that policies are in place to identify potential conflicts of interest and deal with them," he said.
These comments are significant in the backdrop of several cases where RBI has pulled up or penalised directors in private banks and even cooperative banks for various cases of conflict of interest or for misusing the position on the boards.
As banks do their business primarily with depositors’ money and it is, therefore, the responsibility of the board of directors and the management to keep the interest of depositors uppermost in their mind, Das added.