RBI governor Shaktikanta Das on Monday cautioned that the banking regulator has come across gaps in the governance of certain banks, which have the potential to cause some degree of volatility in the banking sector.

This, according to Das, happened despite guidelines issued by the RBI on corporate governance in banks.

The Reserve Bank had issued guidelines for listing out seven critical themes which need to be discussed in the board meetings. These themes are business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources. The Reserve Bank has also issued guidelines on appointment of chairperson and conduct of meetings of the board; composition of important committees of the board; age, tenure and remuneration of directors; and appointment of the whole-time directors.

"It is, however, a matter of concern that despite these guidelines on corporate governance, we have come across gaps in governance of certain banks, with the potential to cause some degree of volatility in the banking sector," the RBI governor says at the Conference of Directors of Banks in Mumbai.

While these gaps have been mitigated, it is necessary that boards and the managements do not allow such gaps to creep in, Das says.

"We have been engaging with some of you on these issues at the individual level, but I thought it would be more effective if we engage with all the Directors together. It is the joint responsibility of the Chairman of the Board and the Directors, both whole time as well as non-executive or part time Directors, to ensure robust governance in banks," says the RBI chief.

According to the Basel Committee on Banking Supervision, "the quality of governance and management is probably the single most important element in the successful operation of a financial institution". Similarly, a study conducted by the Reserve Bank researchers, based on comprehensive econometric analysis, has shown that bank stability is strongly predicated upon the governance structure in the banking system.

"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," Das says.

"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," he adds.

The safety and soundness of the banking system relies critically on effective corporate governance which helps to build an environment of trust, long-term stability and business integrity of banks, according to Das.

"Governance frameworks can be pictured as a complex mesh of nuts and bolts holding the financial pillars of capital, assets, deposits and investments in place and keeping the structure of the bank upright. Raising financial resources would not be a constraint for banks with robust governance frameworks as they can command a governance premium," he says, adding that this premium in turn will be driven by the quality of leadership at the top.

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