RBI deepens scrutiny of bank board meetings and governance practices

The Reserve Bank of India (RBI) is taking a much closer look at bank board deliberations and may issue directives to improve governance practices.

 

Senior officials in both state-run and private banks told Business Standard that following the developments at IndusInd Bank, the central bank’s senior supervisory managers (SSMs) were asking questions on the agenda presented to boards, the time spent discussing specific items, and observations made by independent directors. 

 

Variances in board meeting audio recordings, if any, and the minutes presented are also being looked into. In addition, the RBI is examining the role of board sub-committees, the quality of their deliberations, involvement of the committee members, resolution of dissents, and the inputs provided by the chairpersons (of the sub-committees) to the board. 

 

An SSM is the RBI’s point person for a particular regulated entity (RE) and may, at times, oversee a couple of REs if the entities are small. SSMs are drawn from the RBI’s department of supervision and their rank could either be a deputy general manager or general  manager within the RBI. Every SSM is supported by a team, the size of which depends on the RE’s size and complexity. Senior bankers expect the central bank to convey its views  during the current supervisory cycle to streamline board deliberations and strengthen the sub-committee architecture.

 

Against this backdrop, banks are being made to revisit their implementation of RBI’s master direction on Corporate Governance (May 18, 2016); and the circular on Governance in Commercial Banks (December 2, 2021).

 

The central bank’s message (through SSMs) is clear: Mere box-ticking will not suffice. In the immediate aftermath of the derivatives mess at IndusInd Bank, SSMs had taken a keen interest in bank treasury protocols and housekeeping practices.

 

In the spotlight is a key decade-old circular (May14, 2015) that did away with the ‘Calendar of Reviews’ — a framework requiring boards to review 21 preset items. The circular had observed that the calendar consumes considerable time and, as a result, boards “may not be in a position to give focused attention to matters of strategic and financial importance”. It had advised that banks determine board agenda items, and the periodicity thereof, with the approval of their boards, such that there was adequate focus on matters of strategic and financial importance. 

 

The shift, in line with the recommendations of the P J Nayak Committee to Review Governance of Boards of Banks in India (May 13, 2014), focused board deliberations on seven critical themes – business strategy, financial reporting integrity, risk, compliance, customer protection, financial inclusion, and human resources.

 

The Nayak committee had noted that a greater number of issues discussed by a board was positively correlated with bank profitability, while a higher number of risk-related discussions showed a negative correlation with net non-performing assets. Likewise, more focus on business strategy correlated positively with returns on assets.

 

Board papers run into several hundred pages (including approval-related items and notings) and board meetings usually last about two and a half to three hours; sub-committees are typically shorter. SSMs are now asking questions on the granular aspects, such as the time spent discussing specific issues, and broadly, adherence to the May 14, 2015, circular. 

 

Governance-related issues were specifically referred to by former RBI governor Shaktikanta Das in a first-of-its-kind interaction with the full boards of banks on May 22 and 29 in 2023 (in New Delhi and Mumbai, respectively).

 

Das had held that the central bank’s supervisory assessments revealed that sometimes the information being put up to the board was laden with gaps and material inaccuracies.

 

Further, the agenda notes being reviewed by boards did not capture all the relevant information which made their review either ineffective or partially effective. In some instances, agenda papers were not being circulated well in advance. “There were also instances of only Powerpoint presentations being circulated as agenda notes. These presentations are like a guided tour, and directors should clearly look beyond a guided tour,” he said. 

A closer look

 

• RBI is asking banks for detailed info on board agenda, including time spent on each topic and the role of independent directors
• It may soon suggest ways to improve board discussions and sub-committees 
• Banks reviewing governance practices, according to RBI’s 2016 and 2021 rules
• Former RBI governor Shaktikanta Das had flagged governance issues at meetings with full bank boards