Swaminathan J, Deputy Governor, Reserve Bank of India in this speech points to expectations from Directors of Urban Co-operative Banks:
9. Effective governance forms the foundational bedrock. For UCBs, the need for robust governance mechanisms is even more pronounced due to their unique position as community-centric entities. Transparent decision-making, accountability, and adherence to best practices are paramount. Only Boards whose members meet the standard of fit and proper in terms of age, relevant qualifications, experience and proven clean track record along with the right aptitude will be in a position to deliver the desired results.
10. As I mentioned earlier depositors are major stakeholders and banks should always ensure that their interests are safeguarded. Directors should see themselves as trustees of the depositors’ hard-earned savings. After all, it is their money which keeps the bank ticking. Encouraging depositors to become members can further enhance their sense of ownership and engagement in the institution’s welfare as well as improve the capital base of the bank.
11. A basic understanding of the bank’s financial statements is absolutely essential for a director. The UCBs should explain their accounts to their directors in detail, especially where the bank stands on important parameters such as capital adequacy, liquidity, asset quality and profitability. Further, the financial statements should be fully compliant with accounting standards. I would urge directors to carefully go through the auditor’s report and ascertain if it is qualified or clean. Please engage with the auditors to understand their observations and concerns.
12. Similarly, this understanding of finance is also relevant for laying down underwriting standards and assessing credit proposals. Directors should be mindful of build up of concentration in their credit portfolios and try to diversify the risk, while closely monitoring the large exposures. Credit decisions should be solely based on the merits of each case, free from any external influences or considerations. Extending loans to connected parties such as relatives of directors and senior management are not in consonance with statutes, regulations, and good governance practices. These should be avoided.
13. While assessing proposals for restructuring, banks should have assessed the viability and have reasonable certainty of repayment from the borrower as per the restructured terms. In the context of NPAs, UCBs with assets in excess of ₹1,000 crore are already required to have system-based asset classification and Directors should ensure that the system has been implemented with a proper policy for any manual overrides over system-based classification.
14. Directors also bear the responsibility of exercising vigilance regarding their banks’ adherence to various statutory and regulatory requirements. RBI inspection reports should be discussed in the Board threadbare, and the observations should be suitably addressed in a timely manner. Further, for meaningful improvement the compliance given should be sustained. It should be ensured the same mistakes are not repeated. It would be useful for directors to seek regular updates from the bank on important RBI circulars and instructions. This approach not only reinforces the Board’s oversight role but also contributes to a robust regulatory compliance framework.
15. I would also urge UCBs to have a good vigilance system, effective internal audit and fraud detection mechanisms in place. When frauds occur, the bank should promptly report to the regulator and other concerned authorities. Root causes should be suitably addressed. There should be zero tolerance towards acts of malfeasance.
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