The Reserve Bank of India has found some gaps in governance at certain banks, governor Shaktikanta Das said on Monday.
These gaps have the potential to cause some degree of volatility in the banking sector, he said.
"While these gaps have been mitigated, it is necessary that Boards and the managements do not allow such gaps to creep in," Das said during a speech.
The Governor said 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. It is of utmost importance that the Directors "keep themselves updated with material changes in the bank’s internal environment as well as the external factors that have a bearing on the bank," he added.
Das reminded individual directors that they should not have any conflict of interest which may hamper their objectivity and independence.
He said that at times the RBI has noticed the dominance of CEOs in Board discussions and decision making. It has been seen in such cases that Boards are not asserting themselves, he added.
The RBI would not like this type of situation to develop, the Governor asserted.
Besides, "it is necessary that ‘independent’ directors are truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties," Das observed.
He urged independent director to "always remember that their loyalty is to the bank and no one else."
Das underlined the importance of public trust in the banking system, citing the examples of recent bank failures in the US. "This was a classic case wherein public trust in certain banks evaporated suddenly," he noted.
The safety and soundness of the banking system is critically dependent on effective corporate governance, he said. That helps to build an environment of trust, long-term stability and business integrity of banks, he added.
The RBI has significantly strengthened regulation and supervision of the entire financial sector in recent years, Das noted.
RBI's priority is protection of depositors’ money and ensuring a robust financial sector for the country to progress, Das said, adding that is the responsibility of Boards of Directors and Managements of Banks to keep the interest of depositors uppermost in their mind.
The Senior Management is responsible for providing material information to the Board in a "timely, accurate and understandable manner" so that the Boards can take informed decisions, Das said.
The RBI Governor's speech enumerated a 10-point charter for Indian banks to take note of. The areas he covered today included:
Source Name:Economic Times