RBI will keep a close eye on NBFCs, performance of bank MDs, CEOs, says Shaktikanta Das

Reserve Bank of India Governor Shaktikanta Das has said the apex bank would continue to keep a close eye on developments in the NBFC (non-banking financial companies) sector and would take every possible step to ensure its financial stability. He said several steps had been taken to enhance the supervision over NBFCs, including on-site examination, off-site surveillance, market intelligence and annual reports of statutory auditors. He also said the RBI was working towards finalising a new arrangement under which all stakeholders, including statutory auditors, credit rating agencies and banks with big NBFC exposures, would engage in period interaction to assess issues.

He said the RBI wanted to harmonise the liquidity norms between banks and NBFCs. The RBI governor added the central bank would work towards bringing corporate governance reforms in both banking and non-banking sectors to improve transparency. "It has been observed that most bank frauds can be traced to the absence of effective controls. An essential element of an effective system of internal control is a strong control mechanism. It is the responsibility of the Board of Directors and senior management to emphasise the importance of internal control through their actions and words. Banks should regularly reorient and train their personnel so that they fully understand the importance of internal controls in their respective stations. The boards of banks should specifically pay attention to creating and sustaining a culture of effective control in the banks," Das said, while delivering 15th annual convocation address here at National Institute of Bank Management, Pune.

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To improve the functioning of the PSB boards and to foster corporate governance, Das said the RBI was working on streamlining appointment process, succession planning and compensation. He added the RBI also needed to create "a pool of independent directors across various areas of expertise."

Additionally, there's a need to closely monitor the performance of MDs, and CEOs of both public and private banks, he said, adding that it could be done by the board of directors either through a sub-committee or an external peer group review. "An effective performance evaluation system should also be put in place for banks to improve their financial and operating parameters. The government, the Bank Board Bureau and the Reserve Bank are engaged in developing an objective framework for performance evaluation of public sector banks (PSBs)," he said.

Talking about corporate governance issues in private banks, Das said the central bank had issued a discussion paper to address some problems in the sector, including incentive structures, quality of audit and compliance. Under this discussion paper, measures like the specification of minimum variable pay component by banks and clawback arrangements had been included, he said. Some private lenders, including Yes Bank and Axis Bank, have been on the RBI radar recently, which has led to major changes in their top management.

On the issue of non-performing assets, Das said efforts made by the RBI in strengthening its regulatory and supervisory framework and the resolution process through Insolvency and Bankruptcy Code (IBC) were bearing fruit. "This is reflected in significant improvement in asset quality of scheduled commercial banks (SCBs) during 2018-19 as gross NPA ratio declined to 9.3 per cent as on March 2019," he said.

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