RBI flays banks for lack of governance

The Deputy Governor of Reserve Bank of India, K C Chakrabarty, on Friday came down heavily on banks for lack of governance and opaque practices on pricing of loans.

“There should be non-discriminatory and transparent loan pricing… It will be one of the most important aspects of regulatory guidelines. Banks that will not follow this are going to suffer,” Chakrabarty said on the sidelines of banking seminar, Bancon. Chakrabarty’s comment comes after banks failed to implement various processes aimed at benefitting the customers which they had promised to implement. These include waiving prepayment penalty on floating home loans, which is being advocated by the regulator.

Chakrabarty also said RBI's supervisory department will check how much time the bank’s top management, like chairman and executive directors, spend in their office and will review the governance structure.

During the second quarter review of monetary policy in October, RBI had set up a committee to look into principles governing proper, transparent and non-discriminatory pricing of credit.

“We have appointed a pricing committee. What we are saying is banks must strengthen their corporate governance. As a regulator it is my job to caution banks. If they don't improve governance, the restraint will not come from me, it will come from the owner,” Chakrabarty said.

He said certain discrepancies that have been noticed by the regulator like bank's base rate increase, is not truly reflecting the increase in cost of funds. Base rate, a cost-plus method of loan pricing, is the minimum rate below which banks cannot lend and was implemented in July last year aimed at increasing transparency while pricing loans.

“Corporate governance will undergo a change and senior managements will have to bring out good corporate governance in managing issues,” he said. The Deputy Governor blasted on banks for making too much profit at the cost of competition.

“Banking in India is one of the most profitable businesses. Banks lose money everywhere in the world but not in India. Because of lack of competition banks are making too much money at the cost of competition,” he said.