The Reserve Bank of India (RBI) has multifarious responsibilities, which it discharges to ensure that the financial sector, especially the banking sector, is kept in good shape. Together with the Ministry of Finance, the RBI is responsible for the growth, with stability, of the Indian economy, in a manner that best serves the interests of the people of India.

In discharging its duties, the RBI has to ensure that the regulated entities (REs) in its domain do not take liberties with law and regulations, and conform to the basic tenets of good conduct. At the apex level, the RBI is the custodian of Corporate Governance in the banking sector. This responsibility derives from the need to protect the interests of a very large number of depositors and other stakeholders who make the banking sector what it is.

Over the last several decades, the RBI has had to write and refine a number of rules and regulations to ensure that the requirements of sound Corporate Governance are appropriately addressed. Some regulations lose their relevance and legitimacy with the lapse of time, and they do not deserve to occupy space in the regulatory environment. As part of its efforts, RBI had set up a Regulations Review Authority (RRA) in 1999. It is the only Regulator that has set up such a forum to review the existing regulations, circulars, reporting systems to remove regulations that are past their sell by date. RRA 2.0 was established in 2021, with the objective of reducing the compliance burden on REs, by streamlining the regulatory instructions and rationalising reporting requirements.

Despite conscious efforts by the Regulator, there are various issues which the REs face. These include:

• Cost of Compliance – Regulators should be mindful of the cost of compliance, especially for smaller entities. Further, too many or too frequent changes are often disruptive for REs. There is a need for a conscious effort for conducting regulatory impact assessment studies before Regulations are introduced. .
• Board structure and effectiveness – RBI has mandated for the post of Chairperson and MD to be separate in banks. This a good move. However, a number of Public Sector Banks suffer from a lack of a Chairperson for the Board. There are also Boards which have vacancies for Independent Director positions.  There is a need for RBI to take steps to ensure that such vacancies are filled without loss of time. This causes gaps in boardroom functioning.
• Constitution of mandatory Board-level committees – Given the nature of banking industry, banks are required to constitute more than 10 mandatory Board-level committees. Some of these committees can be combined, owing to their roles being similar, in order for Boards to have committees with full fledged scope of work, so that their functioning are effective. For example, the committee dealing with customer service can be merged into Stakeholders Relationship Committee since customers are stakeholders. Further, the role of some of the committees seem to border on executive action. Board-level committees, comprising non-executive Directors, should not be made to perform executive action.
• Number of meetings – Banks end up having far more meetings than the minimum prescribed number, both for Board as well as committees. This results in the bandwidth of management persons getting severely compromised. There are a number of actions required both pre and post a meeting, including actioning the decisions taken at such meetings. With such a large number of meetings, time available with management persons for such actions gets constrained.
• Risk management – While RBI tries to stay ahead of the curve for risk management, newer risks are evolving, and RBI always has to be ahead of the curve.
• Inadequate consultative process- RBI should follow a more consultative process before bring Regulations/ amendments thereto. This would help RBI understand any practical challenges that the REs may face with changes. Such changes should focus on making India more in line with global best practices.
• Investor Protection – It is very important to safeguard the interest of investors. Depositors in the banks have been given protection of upto Rs. 5 lakhs, in the case of a failure of a bank. Investors in capital markets are given a protection of upto Rs. 25 lakhs. There is a need to increase the efforts to provide more investor education so that they are aware of their rights.
• Capacity building – All regulatory bodies should focus on capacity building, so that the Regulator itself has persons who understand changes in the sector. This would also promote meaningful dialogue between the Regulator and the RE.

There has been a growth of fintech companies, with aggressive lending practices. RBI has been increasing its supervision of such companies. However, legal framework, including having processes and systems in place, for such companies may need strengthening.

In India, licensing of Small Finance Banks (SFBs) was introduced in 2014, with the primary objective of advancing financial inclusion. SFBs were thought to have a crucial role in extending financial services to the underserved, and driving inclusive growth. However, RBI has expressed concerns over increased asset quality stress, and high concentration risks relating to SFBs. Other areas of concern included gaps in corporate governance and succession planning. Merger of some of these SFBs, to avoid concentration risks, is something that RBI is exploring.

Faith and trust in the financial institutions are important for India to grow and prosper. The right framework will help create and sustain it.

Prerna Mohan