Blogs

The Reserve Bank of India (RBI) has wide-ranging responsibilities, since it is responsible for ensuring the well-being of the financial sector, especially the banking sector. Along with its combined efforts with the Ministry of Finance (MoF), the RBI is one of the the reasons for the growth and stability of the Indian economy, in a way suited to the interests of the country.

While fulfilling the responsibilities, RBI also needs to ensure that the Regulated Entities (REs) under it remain as diligent as possible, are compliant with all the concerned laws and regulations, and adhere to the fundamental principles of good conduct. Because of being a Regulator, RBI is considered one of the stewards of Corporate Governance with respect to the banking sector. The need to inculcate Corporate Governance stems from the responsibility the RBI has towards the protection of interests of the stakeholders of the entire banking sector.

Over the last few decades, the RBI has been at the forefront of creating rules and regulation, and amending the existing ones, if required, thus ensuring that the requirements of sound Corporate Governance are accordingly met. Many laws and regulations become outdated with the passage of time, and thus the need to bring new ones/ amending the existing ones arises. In the light of such advancements, RBI had set up a Regulations Review Authority (RRA) in 1999. RBI happens to be the only Regulator that has set up an authority that reviews the existing regulations, circulars and other reporting systems to remove regulations that cease to be relevant. RRA 2.0 was established in 2021, with the aim to reduce the compliance burden on REs, through simplification of the regulatory instructions and standardizing reporting requirements.

Irrespective of the continuous efforts, there are several issues that the REs face, namely :

• Cost-Extensive Compliance – Since the compliance can be cost-extensive, Regulators should be mindful of the same, especially with regard to smaller entities. Additionally, frequent changes can become troublesome for the REs. What they need is continuous efforts to conduct regulatory impact assessment before introducing newer regulations.
• Board structure and effectiveness – As per RBI mandate, it is compulsory for the Chairperson of the Board to be separate from the Managing Director. Even though it is a great move, there are a few Public Sector Banks that do not have a Chairperson for extending time periods. Also, there exists such Boards which have vacant Independent Director positions. It is time that RBI needs to take appropriate measures to make sure all such positions are filled without any further delay. Such vacancies are a major source of gaps in boardroom functioning.
• Setting-up of mandatory Board-level committees – In the banking industry, it is imperative for all the banks to constitute more than 10 mandatory Board-level committees. If more than one committee has a mandate similar to another, then the two can be combined to make the functioning more effective. A relevant example of the same can be merging the Stakeholders Relationship Committee with the Customer Service Committee, since one of the major stakeholders are the customers of the bank.
• Number of meetings – It turns out that banks eventually end up having more meetings than the minimum number, whether for Board or other committees. As a result, the capacity of management personnel gets highly compromised. Due to the higher frequency of meetings, the time required to take the actions, both pre and post meetings, get restricted.
• Managing Risks – Even though RBI always tries to stay one step ahead with its effective risk management framework, newer risks keep evolving, thus making this an ongoing process.
• Unsatisfactory consultative process – RBI needs to follow a more consultative process before introducing any regulations/amendments. This would help RBI take note of the practical challenges faced by REs. Their suggestions would help our country come at par with the best global practices.
• Safeguard Investors’ Interest – The protection of the interest of investors is important. In cases of bank failure, the depositors are given protection of up to Rs. 5 Lakhs, whereas this limit is Rs. 25 lakhs for investors in capital markets. To make the investors aware of their rights, it is important that measures be taken to provide better investor education.
• Capacity building – The focus of the regulatory bodies should be on capacity building, in order to help REs employ better quality personnel. It can also help in fostering fruitful conversation between the Regulator and the RE.

Fintech companies have seen tremendous growth, all thanks to aggressive lending practices. Due to this, RBI’s supervision towards them has increased significantly. Nonetheless, the legal framework and other regulatory processes for such companies would still need improvement.

To strengthen financial inclusion efforts, the licensing of Small Finance Banks (SFBs) was implemented in 2014. SFBs were ought to to play a vital role in expanding the scope of financial services to the marginalized, while attaining comprehensive growth. To its surprise, RBI has raised concerns over increased asset quality stress, and high concentration risks relating to SFBs. Further problem areas point to the gaps in Corporate Governance and succession planning. To combat this issue, RBI is now planning to merge some of the SFBs to avoid concentration risks.

The confidence and belief the countrymen have in the financial institutions are imperative for any country to prosper. The goal is to have a proper framework that would establish and uphold it.