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RBI Financial Stability Report: Governance standards at FIs key to growth revival

Mumbai: Reserve Bank of India governor Shaktikanta Das said upholding “corporate governance” standards at financial institutions was central to a sustainable economic recovery. It would also bolster the faith of various stakeholders in the financial system.

“The importance of good corporate governance across the board… to my mind is the most significant factor that can lift the efficiency of our economy to its full potential,” Das said in the foreword to the 20th Financial Stability Report issued by the RBI on Friday.

The Indian banking system had improved since last year’s report, it said. The regulator’s supervision had brought to focus “accountability” and “responsibility” among other things.

Lax corporate governance has been in focus over the past few years with accusations of favouritism toward borrowers and corruption influencing loan approval. ICICI Bank last year terminated the services of Chanda Kochhar as chief executive for suspected governance code violations.

“Private sector banking space also needs to focus on aspects of corporate governance,” said the report.

In a recent dispute between ICICI Bank and Kochhar, the regulator sided with the bank and said the termination had been made in consultation with it.

“The exercise of powers of the RBI was an exercise within the jurisdiction, proper and in good faith, after properly considering the request of the ICICI Bank,” the RBI had said in its affidavit. “It is not the function or role of the RBI while exercising such power to micromanage the actions of a bank and substitute its commercial wisdom for that of the bank.”

Furthermore, the financial system has also been rocked by the Punjab and Maharashtra Co-operative Bank fraud case with loans being allegedly given to people with criminal charges. Failed mortgage lender Dewan Housing Finance Corp Ltd (DHFL) is also alleged to have engaged in transactions violating governance practices.

The central bank is also tightening the screws on pay packages with provisions for claw backs in the event of a bank foundering.

“The Reserve Bank of India has laid down rules for compensation packages offered to the top management of private lenders and foreign banks and introduced mandatory rules to claw back the rewards if a lender falters,” said the report. “Risk taking and governance in a financial intermediary are inextricably linked. This link makes governance in a financial institution akin to culture of a society and has to be observed more from practice than from the enshrined codes.”

Source: Economic Times