Banks need to design appropriate governance standards and implement internal controls: Deputy Governor, RBI

Banks, as repositories of public resources, need to design appropriate governance standards and implement internal controls to be worthy of the public trust, according to MK Jain, Deputy Governor, Reserve Bank of India.

“It is also well-acknowledged that shareholders are driven by maximisation of the returns on their capital. But in banks, this objective is realised largely through the resources raised from depositors.

“…Being highly leveraged entities and with their inter-connectedness, there must be separation between ownership and management so that they operate on professional lines,” Jain said at an event organised by a financial daily.

He emphasised that banks enjoy the privilege of mobilising uncollateralised public deposits and operating with high levels of leverage.

“The negative externalities of banks and NBFCs are also much higher than those for any non-financial entity due to their inter-connectedness. That’s why, globally, banks are regulated and supervised very closely,” Jain said.

Tools for proactive off-site and on-site supervision

For continuous engagement with supervised entities (SEs), a web-based and an end-to-end workflow automation system will be launched shortly, the Deputy Governor said.

This has various functionalities including inspection, compliance and incident reporting for cyber security, etc. with a built-in remediation workflow, time tracking, notifications and alerts, Management Information System (MIS) reports and dashboards.

Data capabilities

Jain underscored that the data capabilities of the RBI are in the process of being further upgraded through the revamped data warehouse – the Centralised Information Management System (CIMS). This is in addition to Central Repository of Information on large Credits (CRILC) and Central Fraud Registry (CFR).

The data capabilities will encompass tools and applications for AI-ML, data visualisation and big data analytics.

As part of the forward-looking assessment of stress, the Deputy Governor noted that various supervisory tools have been designed to identify vulnerable borrowers who have less ‘distance to default’ as well as vulnerable banks based on various parameters. Early warning systems and supervisory stress testing have been made an integral part of prudential supervision.

“Many thematic assessments are also being regularly carried out to identify system-wide issues and assess ‘conduct’ practices for taking corrective actions. Data dump analysis is also much more extensively used as part of our transaction testing exercise,” he said.

Jain felt that agile and creative thinking is going to be essential in staying ahead of the digital curve when it comes to the evolution of financial services.

The Deputy Governor said, “Financial institutions would need to experiment with new technologies and tailor their products and services in alignment with business strategy and competitive considerations as well as in compliance with existing laws and regulations.”

“Leveraging on technology will also require enhanced financial investments, building expertise and capacities, proper resource allocation and further strengthening of the operational capabilities.”