Banks' strategies, business models under RBI lens: Shaktikanta Das

Boards' role in challenging management proposal critical: Das

The Reserve Bank of India (RBI) has started taking a close look at the business models of banks and their strategies after it transpired that some of them are interested in serving their investors rather than their depositors.

Speaking at the banking conclave of State Bank of India (SBI), RBI Governor Shaktikanta Das sounded a word of caution to commercial banks over their business practices while acknowledging that they had weathered the pandemic shock better than expected.

“At the RBI, we have started taking a closer look at the business models and strategies of banks. Certain banks had followed the ‘high-risk and high-return’ business strategy, with a skewed priority for serving only the interests of their investors,” the governor said.

“Banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the board, instead of being driven by mechanical ‘follow the market’ approach,” Das said while addressing a gathering of bankers. 

Das, who became RBI governor in 2018 for three years, recently got an extension of another three years.

While emphasising the need for good governance for strong and resilient financial institutions, Das said the board of directors of a bank had the responsibility of being the guardians of the trust that the depositors reposed in it.

“A bank’s responsibility towards the depositors should, therefore, be weighed against its responsibility towards the shareholders,” he said.

The board of a private sector bank appoints the managing director and chief executive officer and other board members. These appointments need the RBI’s approval.

The Central government appoints the board members and chief executives of the public sector banks. Their boards mostly remained vacant in the past seven years, with many of them not even having a chairman.

The governor said the RBI had high expectations from the oversight role of the board to ensure good governance.

“… business priorities need to be complemented with responsible governance and ethical actions.”

Das went on to say the role of the board, especially in challenging the proposals of the management, was critical.

Capital management

 

The regulator urged the banks to focus on and further improve their capital management processes with a forward-looking, scientific, and prudent approach while highlighting the capacity for loss absorption as an ongoing responsibility of the lending institutions.

“It is expected that banks will exhibit prudent risk-taking behaviour and use their capital efficiently,” he said.

He said with part of the regulatory support to borrowers unwinding, some restructured accounts might face insolvency issues over the coming quarters.

There was also a word of caution for the lenders on the increasing digitisation of financial services and their collaborations with fintechs. The governor said regulatory expectations from such tie-ups should be in accordance with a bank’s own commercial wisdom and subject to regulatory guardrails, because “the risks ultimately lie in the books of banks and non-banking financial companies (NBFCs)”.

Das emphasised timely resolutions of customer complaints. “Thirty days is a very reasonable period for resolving customer complaints,” he said in the context of the RBI’s ombudsman scheme, which deals with complaints pending with banks and NBFCs for over 30 days.

Banks must be investment-ready

The governor expected the organised corporate sector to play a major role in turning the investment cycle. In this context, banks should be investment-ready when the cycle picks up.

“It is incumbent upon a competitive and efficient financial system to identify high productive sectors and reallocate resources to harness growth opportunities,” Das said. “Banks have been prudent in raising capital, and profitability metrics of several banks are also at the highest level in several years.”