Be vigilant for concentrations in biz models: RBI Guv Das to bank boards

Says need to curb unethical practices such as mis-selling of products

The boards of Indian banks should remain vigilant about the build-up of concentrations within their business models, said Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday.

 

This is to ensure there is no excessive reliance on specific sectors, markets, or customer segments that could expose the banks to amplified risks, particularly during times of economic stress or industry shifts, Das said at the at the conference of directors of private sector banks in Mumbai on the theme Transformative Governance through Sound Boards.

 

Observing that boards should adopt a proactive approach in identifying and addressing potential challenges, Das said bank boards must play an active role by regularly monitoring their portfolios, identifying potential areas of over-concentration, and taking pre-emptive steps to maintain a balanced approach.

 

“Boards must move beyond traditional oversight roles and embrace agility, foster innovation, and ensure sustainability and adaptability to today’s dynamic environment,” Das said.

 

At a time when the Indian economic landscape is being shaped by technological advancements, the rise of new-age fintech entities, third-party dependencies, and climate change, there is a need for bank boards to serve as a “lighthouse for banks, providing steady guidance to navigate these challenges and steer towards safe and prosperous shores,” Das cautioned.

 

He highlighted that bank boards must adopt a proactive approach to identifying and addressing potential challenges, which necessitates a clear understanding of both external conditions and the internal dynamics within the organisation.

 

“The board needs to continuously assess external factors like regulatory changes, shifting market trends, overall macroeconomic changes, and advances in technology. Boards should also be fully cognisant of the organisation’s internal strengths, vulnerabilities, and operational conditions to ensure clear situational awareness,” the governor said.

 

Taking cue from the CrowStrike incident, which caused global disruption, Das emphasised that bank boards must remain vigilant about operational risks, particularly those arising from IT outsourcing and reliance on third-party vendors.

 

Further, he said bank boards need to actively safeguard the independence of key functions, such as risk management, internal audit, and compliance. Boards should ensure these functions are adequately resourced with skilled staff and are given due prominence within the organisation.

 

Das also stressed that bank boards and their customer service committees must demonstrate a genuine commitment to customer centricity.

 

“The flexibility and space available to banks for formulating their internal board-approved policies in line with regulatory expectations must be used with utmost prudence, especially when it affects customers,” Das said, adding that boards should closely examine service charges and penalties, particularly when they are treated as avenues of profit, involve forced bundling of products, or when disclosures to customers are non-transparent or selective.

 

“Ensuring fair lending practices and implementing robust grievance redress systems are critical to protecting customers’ interests,” he further noted.

 

Separately, Das emphasised that bank boards must also focus on strengthening internal governance frameworks within the bank.

 

“Unethical practices, such as mis-selling of products or opening accounts without proper KYC verification, need to be curbed. Staff incentives should be carefully structured to avoid encouraging mis-selling or unethical practices. While such practices may yield short-term gains, they ultimately expose the bank to significant long-term risks, including reputational damage, supervisory scrutiny, and financial penalties,” he said.

 

Meanwhile, Das appreciated bank boards for helping maintain the resilience of the sector but cautioned them to use the sector’s strong fundamentals to reinforce and fortify defences. “Good times, after all, are the best times to reinforce resilience and grow sustainably,” Das said.