Building bridges anew: RBI, banks must fine-tune board roles in governance

Last week, Tuhin Kanta Pandey called for redefining the role of independent directors (IDs): that they must be regarded and treated as stewards of accountability. “We cannot continue to view them as honorary appointees or friendly critics. They must be viewed and treated as stewards of accountability,” said the chairman of the Securities and Exchange Board of India (Sebi). For bankers, it was a déjà vu moment. Shaktikanta Das, as governor of the Reserve Bank of India (RBI), had in May 2023 observed, “It is necessary that ‘independent’ directors are truly independent.” 

The developments at IndusInd Bank have led RBI’s senior supervisory managers (SSMs) to take a closer look at bank boards, including the agenda presented, the time spent discussing specific items, and observations made by IDs. Banks’ compliance heads say (off-record) that a directive spelling out measures to improve governance may be in the offing. This even as it is felt that boards are turning executive in nature; having to increasingly deal with minutiae; and that it is nearly impossible to deliver on Mint Road’s expectations. 

The build-up to this situation has been in the works for long. The blowouts at Yes Bank, PMC Bank, Dewan Housing Finance, and less-than adequate governance standards in many regulated entities (REs) led the RBI to turn up the supervisory knob. Says Subhash Chandra Garg, former union finance secretary, “In the last few years, the RBI’s supervisory approach has also become more granular and intrusive. The supervisory pendulum has swung to the other extreme.” 

Best practices 

“The challenge is in ensuring a clear and sustained distinction between the strategic role of the board and the executive management. These roles often blur, partly due to differing interpretations of regulatory and supervisory expectations. To address this, the RBI can draw upon global regulatory best practices to further refine governance standards across regulated entities,” suggests Ravi Duvvuru, partner, Duvvuru & Reddy LLP and member, advisory group to the second Regulatory Review Authority. 

In the United Kingdom (UK) and Australia, regulators define the roles of boards and executive management through legislation and prudential standards. For instance, the UK’s Senior Managers and Certification Regime mandates a “responsibility map” for senior executives.  Similarly, structured board processes and information flows, as seen in the Hong Kong Monetary Authority’s approach, ensure that boards receive strategic insight rather than operational detail. In some jurisdictions, external evaluations are used to assess the quality of information presented to boards. And regulators in the UK, United States and Canada regularly engage directly with the chairs of board committees — especially audit and compliance, risk, and customer service — to strengthen accountability and oversight. The global regulatory trend is clearly toward greater formalisation, accountability, and empowerment of boards. 

According to Duvvuru, given the diversity of bank ownership structures, the RBI could consider developing a consolidated ‘Bank Board Governance Code’ that integrates international best practices with Indian realities. But even the most thoughtfully designed governance frameworks can fail if supervisory staff interpret or apply them inconsistently.  To mitigate this, the RBI can adopt institutional practices followed by global regulators such as the UK Prudential Regulation Authority, US Federal Reserve, and the Monetary Authority of Singapore — all of which use detailed supervisory handbooks and assessment manuals to guide field staff. 

Another peeve of senior bankers is that many among the RBI’s field staff (inspectors) and SSMs are not aware of what goes into taking commercial decisions.  M Damodaran, in his commentary as chairperson of Excellence Enablers, points to the time when middle-level RBI officers were deputed to state-run banks for a couple of years to get an understanding of commercial banking before they were given positions in the departments of supervision and regulation.  “It might be worthwhile to consider deputing the SSMs for two years to these banks so that they have experience of what commercial banking is all about,” says Damodaran, who is also the former chairman of Sebi. 

Board politics 

Das had also called attention to a subject long under the oath of omerta: the power structures within banks’ boards. “We have noticed the dominance of CEOs in board discussions and decision making…We would not like this type of situation to develop.”  He referred to instances of agenda papers not being circulated well in advance of board meetings; of power-point presentations being circulated in lieu of the same. And here is a pithy gem: “These power-point presentations are like a guided tour, and directors should clearly look beyond a guided tour”. In part, this is because boards have IDs who are not current with the issues of the day, and some are beholden to CEOs. 

Another reason for bank boards becoming executive in nature, according to Garg, is senior officials have become risk averse: “As they avoid individual accountability, all matters get pushed to boards, making it a super committee.” In the here and now, can bank board functioning be streamlined? “I feel the board committee architecture needs to be fine-tuned such that strategic issues are discussed in depth at the board level, rather than too much time being spent (by boards) on compliance, regulatory and operational matters which the committees could handle,” notes Vimal Bhandari, who serves as chairman of HDFC MF Trustee Company; and as ID on the board of Escorts Kubota. 

It is worth recalling that in the case of urban cooperative banks with deposits of over ₹100 crore, Mint Road (December 31, 2019) introduced a board of management (BoM) in addition to the board of directors. The BoM has specialists from accountancy, rural economy, banking, cooperatives, finance, law, small scale industry, and information technology. It was seen as needless duplication back then, but has worked. While no one so far suggested that this structure (a version of which is prevalent in Europe) be migrated to mainstream banks, the reality is as banking gets more complex, much more will be expected of boards and IDs. 

“An important criterion to become an ID is relevant experience/expertise. This cannot be a ‘tick the box’ exercise to fulfill RBI’s asks on paper, but has to meet the spirit of regulation too,” feels Gurumurthy R, who sits on the boards of Axis Capital, Arka Fincap and Religare Enterprises (he was also the former head of governance, RBL Bank). “The regulator may want to consider enhancing the compensation payable to the board members in this context,” he adds. 

It is time to take a fresh guard.