Asserting that banks are repository of public resources, Reserve Bank Deputy Governor M K Jain on Tuesday said lenders need to design appropriate governance standards and implement internal controls to be worthy of the public trust.
Corporate governance is the cornerstone for any enterprise and it assumes a distinctly different undertone and importance for banks, he emphasised.
It is well known that banks are special in terms of services they render and the segments they touch, and they act as catalysts in growth of the economy. Most importantly, banks enjoy the privilege of mobilising uncollateralised public deposits, he added.
He pointed out that the negative externalities of banks and NBFCs are also much higher due to their interconnectedness and that's why globally, banks are regulated and supervised very closely.
"Being highly leveraged entities and with the interconnectedness, there must be separation between ownership and management, so that they operate on professional lines," he said at an event organised by Business Standard newspaper.
Stressing that governance reforms have been an area of continued focus for the RBI, Jain said that various regulatory measures, including the mandatory listing of private sector banks, composition of the board and guidance on fit and proper criteria, have all been driven to improve the corporate governance and internal controls in the banks.
"As repositories of public resources, banks need to design appropriate governance standards and implement internal controls to be worthy of the public trust," he said.
He said various prudential supervisory initiatives have been taken by the RBI in recent years for bringing about the unified and more holistic approach to supervision and improving skill and capacity of supervisory staff.
For continuous engagement with supervised entities, he said, a web-based and an end-to end workflow automation system has been developed.
"It has various functionalities, including inspection, compliance and incident reporting for cyber security... with a built-in remediation workflow, time tracking, notifications and alerts, Management Information System (MIS) reports and dashboards. This is being launched shortly," he said.
As banks are in the business of taking risks, sound risk culture lies at the heart of every decision that they take, he said, adding that the RBI too has made risk culture and business model analysis as part of its supervisory assessment in alignment with global developments.
With the proliferation of digital banking, Jain said cyber security has become an extremely important area of supervisory concern.
To address concerns, the RBI has developed a model-based framework for assessing cyber risk in banks using various risk indicators, he added.
In this ever evolving and challenging environment, Jain said, "ultimately, it is the operations of a financial entity in terms of its governance standards, business model, risk culture, and assurance functions that will decide how well it fares in the long run".
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