RBI Deputy Governor urges for stringent governance standards in UCBs

He added that it is essential for the director to understand the bank's financial statements as it is important for laying down underwriting standards and assessing credit proposals

Reserve Bank of India (RBI) Deputy Governor Swaminathan J urged for stringent governance standards in urban co-operative banks (UCBs) and said it was imperative to remain vigilant and proactive in upholding the resilience of the sector due to increased interconnectedness of the financial system.

“Some may argue that UCBs are not systemically important in view of their size and turnover. However, if we consider the interconnectedness that binds the entire spectrum of financial entities, it becomes evident that any vulnerable link has the potential to erode public trust and confidence,” Swaminathan J said during Conference of Governance in Urban Co-operative Banks for UCBs in Andhra Pradesh, Karnataka, Kerala and Telangana held in Hyderabad on 24 January.

“In an increasingly interwoven financial landscape, the ripples of even an apparently small disturbance can resonate far beyond its initial impact,” he added in the speech that was uploaded on the RBI website on Monday. He cited the key challenges faced by the sector in the areas of governance and professionalism, adoption and upscaling of technology. 

Speaking on governance and professionalism, Swaminathan said the board must be a transparent decision-making body that is accountable and adheres to best practices. “Only boards whose members meet the standards in terms of age, relevant qualifications, experience and proven clean track record, along with the right aptitude will be in a position to deliver the desired results,” he said.

He added that it was essential for the director to understand the bank’s financial statements as it was important for laying down underwriting standards and assessing credit proposals.

“Directors should be mindful of the build up of concentration in their credit portfolios and try to diversify the risk, while closely monitoring large exposures. Credit decisions should be solely based on the merits of each case, free from any external influences or considerations. Extending loans to connected parties such as relatives of directors and senior management are not in consonance with statutes, regulations, and good governance practices. These should be avoided,” Swaminathan noted.

Further, he said that it was the responsibility of directors to exercise vigilance over regulatory requirements along with ensuring that system-based asset classification was maintained and that there was no manual override.

Directors are also expected to embrace innovative solutions and technology and ensure that it was procured through credible suppliers and after proper due diligence. At the same time, they must be aware of the potential cyber risks and make appropriate provisions for the same.

Speaking on capacity building, he said that leadership potential should be nurtured through various exercises. “I understand that the umbrella organisation (UO) for UCBs is taking shape. I sincerely hope that a professionally-run umbrella organisation in India providing a slew of services and products suited to the UCB sector will provide synergies and galvanise the sector in areas where it may find itself wanting, particularly in areas such as capacity building and upscaling of technology,” Swaminathan added.