Shaktikanta Das
| Photo Credit: Thulasi Kakkat

RBI Governor Shaktikanta Das on Monday (November 18, 2024) asked banks to proactively monitor their portfolios, identify areas of over-concentration, and take pre-emptive measures to address potential risks and challenges.

The Governor also asked bank boards to strengthen the internal governance framework to curb unethical practices, such as mis-selling of products or opening of accounts without proper KYC verification.

In a keynote address at the Conference of Directors of Private Sector Banks, Mr. Das said bank boards need to continuously assess external factors like regulatory changes, shifting market winds, overall macroeconomic changes and advances in technology.

“Boards should also be fully cognisant of the organisation’s internal strengths, vulnerabilities, and operational conditions so that they have a clear situational awareness,’ he said.

The Governor stressed that boards must be cognizant of build-up of concentrations in their business model.

Excessive reliance on specific sectors, markets, or customer segments can expose the bank to amplified risks, particularly in times of economic stress or industry shifts, he said.

“Boards can play a proactive role by regularly monitoring the bank’s portfolios, identifying potential areas of over-concentration, and taking pre-emptive steps to maintain a balanced approach,” Mr. Das added.

The boards, he said must also remain vigilant to operational risks, particularly those arising from IT outsourcing and reliance on third-party vendors.

He also said that the incentives for bank staff should be carefully structured so as not to encourage them to indulge in unethical practices.

“While such practices may yield short-term gains, they ultimately expose the bank to significant long-term risks, including reputational damage, supervisory scrutiny, and financial penalties,” he said in a keynote address at the Conference of Directors of Private Sector Banks.

He further said the Indian banking sector is transitioning through a time which is replete with opportunities as well as risks and challenges.

“The banking sector remains strong and stable. All the financial indicators have improved since we met in May last year, reflecting the efforts of the various participants of the banking sector, including their management and boards,” Mr. Das said.

To keep the resilience of the banking system intact, the Governor emphasised that strong fundamentals ought to be leveraged to reinforce and fortify the defences.

“Good times, after all, are the best times to reinforce resilience and grow sustainably,” he added.

Mr. Das also said that in the rapidly evolving and technology-driven environment, organisations face significant challenges and risks.

Factors like technological advancements, the rise of new-age fintech entities, third-party dependencies and climate change are reshaping the economic landscape, he added.

Amid these shifting tides, bank boards should serve as a lighthouse for lenders and provide steady guidance to help navigate these challenges and steer towards safe and prosperous shores, he said.