RBI governor warns bank boards against overaggressive growth, evergreening
Mumbai, May 29, 2023
Gaps in governance of certain banks has potential to cause some degree of volatility, he says
Reserve Bank of India governor Shaktikanta Das has cautioned banks about "overaggressive" growth strategies and evergreening loans, saying he wanted to sensitise their board members.
Das said he has advised chief executive officers (CEO) of banks to speak to the media to dispel misinformation on social media.
“…in this digital age, it took only a few hours to transfer billions of dollars held as deposits in a bank to other institutions, leading to a severe liquidity crisis… We had to advise the CEOs to interact with the media immediately to set out the facts correctly. There have been instances when the Reserve Bank had to issue press statements to assuage concerns and prevent potential panic,” he said.
The RBI had found that some banks were resorting to "innovative" ways to conceal the status of a loan during supervisory processes and one method evergreening was replaced by another after being pointed out.
“Such practices beg the question as to whose interest such smart methods serve. I have mentioned these instances to sensitise all of you to keep a watch on such practices,” he said.
Das made the comments in a speech to board members of public sector banks on May 22 in Delhi and to private bank boards on May 29 in Mumbai.
Observing that banks' business models should be robust and prudent, Das emphasised on asset-liability management. “Overaggressive growth, under-pricing or over-pricing of products both on the credit and deposit sides, concentration or lack of adequate diversification in deposit/credit profile can expose the banks to higher risks and vulnerabilities,” he said.
He said gaps were found despite the regulator having issued several guidelines to strengthen governance of banks.
“It is, however, a matter of concern that despite these guidelines on corporate governance, we have come across gaps in governance of certain banks, with the potential to cause some degree of volatility in the banking sector,” he said, adding while these gaps have been mitigated, it is necessary that boards and the managements do not allow such gaps to creep in.
He advocated that banks’ compensation structure should reward prudent risk takers and imprudent decisions are discouraged.
[The Business Standard]
