Bank boards need better processes, not just RBI governance rules

Bank boards are supposed to be part of the solution to the problem of governance of banks. For quite some time now, the Reserve Bank of India (RBI) has sensed correctly that they are themselves part of the problem.  

The previous RBI governor, Shaktikanta Das, initiated the practice of the governor meeting separately with the boards of public as well as private sector banks. The idea was to get comatose boards to take their job a little more seriously.  

At one such meeting that your columnist attended, Mr Das made a simple but striking point. Boards and management should allow relatively young officers to speak their minds at meetings — those at the top may have something to learn. That Mr Das even had to make this point is a telling comment on the culture at banks in general. 

The RBI has been issuing directions to bank boards on matters to be taken up at board meetings. Last November, it issued Master Directions on Governance to boards of commercial banks. Every board has matters that are to be taken up for approval (meaning they require active discussion) and those that are merely for information. The latter are known as “Noting” items.  

The list of “Noting” items expanded over time. At any given board meeting, there would be about 50 or more of these. A chairman would typically think it prudent to spend at least two or three minutes on each item. That meant that a minimum of one and a half to two hours was spent on going through the “Noting” items. Board members tended to use the time to catch up with email and messages on their mobile phones.  

At a quarterly results meeting, the presentation of results takes up two hours or more. The results and the “Noting” items together take up a total of four hours or so, crowding out discussion of all other matters. The challenge before the RBI has been to reduce the list of mandatory “Noting” items so that boards are liberated for the higher things in life.   

Last month, the RBI issued amendments to the directions on governance issued in November, 2025.  The amendments create three categories:

• Policies that require approval of the board, including policies that can be delegated to committees of the board. (There are 19 items including many sub-items in some cases).
• Matters, other than policies, that need to come to the board for approval (18), review (6) and information (10). 
• Matters that may be delegated by the board to various committees at the discretion of the board (38). 

Thus, there are 37 policies and other matters that require board approval. Another 16 items will come to the board for review and information. If this means that “Noting” items are now only 16, it is a considerable improvement.   

The RBI’s Directions of 2025 had advised boards to focus on seven themes: Business strategy, risk management, compliance, financial reporting & integrity, customer protection, financial inclusion and human resources. This constituted an excellent template for bank boards.  

In the latest amendments, only two of the seven items — risk management and customer protection — find mention in the matters for board approval. A new paragraph is now inserted in the earlier Master Directions. It states that in addition to the first two categories mentioned above, matters to be placed before the board must take into account key principles, including the principle that “The Board has ultimate responsibility for the bank’s business strategy and financial soundness, key personnel decisions, internal organisation and governance structure and practices, and risk management and compliance obligations.”

It is not clear what the change from the previous Master Directions achieves. There is no way that any board can escape responsibility for matters such as strategy, financial reporting and human resources. Why not include the seven themes in the matters that require board approval?   

The RBI, as regulator, can only give directions on what should be approved or noted by the board. How well the board does its job is a different matter. And that is where the problem lies. The problem has to do with board processes as well as the structure and composition of the board. This column will confine itself to flagging a few shortcomings in board processes. 

First, four quarterly meetings are hopelessly inadequate to address the gamut of issues before a bank board. Approving policies and other matters would require two or three meetings at a minimum. The board needs one meeting to approve the business plan for the year or long-term strategy.  

There are two important reports that the RBI submits to banks every year, the Annual Financial Inspection (AFI) report and the Risk Assessment Report (RAR). The AFI can be dealt with by the Audit Committee but the RAR requires the attention of the full board, not just the Risk Management Committee. In addition, boards often need to meet at short notice to address a regulatory or other issue that has cropped up. A bank board will require eight to 10 meetings a year to do justice to its responsibilities. The RBI cannot mandate the number of meetings for a bank board but it might keep an eye on the number.   

Second, presentations on key issues (such as the business plan or strategy) are seldom uploaded in advance or uploaded at all. They are sprung on boards at the meeting. What follows is a blur of numbers and charts in over 100 slides. Your columnist had suggested that presentations be submitted well in advance and taken as read; the board meeting should focus on posing questions and raising issues. The suggestion did not gain acceptance: It meant more work for management as well as board members. In perusing board agendas, the RBI’s supervisory officials might keep in mind the submission of all items, including presentations, in advance. 

Third, there are the “table” items that come up for approval. These are items tabled at the end of a meeting, often as board members are about to rise with a much-delayed lunch at the top of their minds. Various reasons are given —a regulatory deadline, a legal deadline, commercial need, etc. Boards must be clear that some items simply cannot be table items, for instance, a settlement with a borrower in respect of a non-performing asset. If they are not clear, the RBI must read the riot act to them. 

Lastly, there is board evaluation, where the independent directors evaluate each other, the managing director (MD) and the chairman. Whether it is self-evaluation or evaluation through an agency, boards merely go through the motions. The RBI may want to see if even a single independent director has been rated poorly by colleagues and not renewed. If an independent director is not renewed, it is more likely because he incurred the displeasure of the MD or the chairman. Bank governance has a long, long way to go.

ttrammohan28@gmail.com