Deputy Governor Swaminathan J urged for stringent governance standards in Urban Co-operative Banks (UCB) and said it is imperative to remain vigilant and proactive in upholding the resilience of the sector due to increased interconnectedness in the financial system.
“Some may argue that UCBs are not systemically important in view of their size and turnover. However, if we consider the inter-connectedness that binds the entire spectrum of financial entities, it becomes evident that any vulnerable link has the potential to erode public trust and confidence. In an increasingly interwoven financial landscape, the ripples of even an apparently small disturbance can resonate far beyond its initial impact,” said J Swaminathan during the Conference of Governance in Urban Co-operative Banks for UCBs in Andhra Pradesh, Karnataka, Kerala, and Telangana held in Hyderabad on January 24. The speech was uploaded on the RBI website on Monday.
He cited the example of the Gujarat-based UCB in 2001 and that of Mumbai-based UCB in 2019 to suggest the contagion risks posed by even relatively smaller banks and emphasized the importance of stringent governance standards, robust risk management practices, and proactive supervision.
He cited the key challenges faced by the sector in the areas of governance and professionalism, adoption and upscaling of technology, and capacity building in various operational areas with a view to enhancing efficiency.
Speaking on governance and professionalism, Swaminathan said the board must be a transparent decision-making body who is accountable and adheres to best practices. “Only boards whose members meet the standards 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,” he said.
He added that it is essential for the director to understand the bank’s financial statements as it is important for laying down underwriting standards and assessing credit proposals.
“Directors should be mindful of the 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,” Swaminathan noted.
Further, he said that it is the responsibility of the Directors to exercise vigilance to regulatory requirements along with ensuring that system-based asset classification is maintained and that there is no manual override over it.
Directors are also expected to embrace innovative solutions and technology and ensure that it is procured through credible suppliers and after proper due diligence. At the same time, they must be aware of the potential cyber risks and make appropriate provisions for the same.
Speaking on capacity building, he said that leadership potential should be nurtured through various exercises. Also, “I understand that the Umbrella Organisation (UO) for UCBs is taking shape. I sincerely hope that a professionally run umbrella organisation in India providing a slew of services and products suited to the UCB sector will provide synergies and galvanise the sector in areas where it may find itself wanting, particularly in areas such as capacity building and upscaling of technology,” Swaminathan added.
First Published: Jan 29 2024 | 8:22 PM IST