Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday warned Urban Cooperative Banks (UCBs) not to use innovative accounting practices to obscure the actual financial position.
During a large UCB Board of Directors meeting, Das emphasized that directors play a very important role in ensuring the integrity and transparency of financial statements.
The above observations are significant as the RBI in 2019 uncovered significant financial irregularities, internal controls and system failures in various off-site monitoring reports at the former Punjab and Maharashtra Co-operative Bank (PMC) and error/understatement exposures.
PMC Bank merged with Unity Small Finance Bank effective January 25, 2022.
Dass emphasized the need for board involvement in maintaining rigorous credit risk management, including robust underwriting standards, effective post-sanctions monitoring, timely identification and mitigation of incipient stress, rigorous tracking of large distressed borrowers for effective recovery, and maintaining adequate supply.
The governor emphasized that the quality of governance is the most important aspect to ensure the stability of individual banks and urged UCB directors to further strengthen governance practices, especially the three pillars of compliance, risk management and internal audit.
Regarding board functioning, Das highlighted five areas: adequate skills and expertise of directors, composition of professional management committees, diversity and tenure of board members, transparency and participation in board discussions, and effective functioning of board-level committees.
The Governor emphasized that UCB’s management should have the autonomy it needs to operate.
Das noted that while the overall financial performance of the UCB industry has improved recently, concerns and vulnerabilities remain in certain individual entities.
He stressed the need for UCB to strengthen its financial and operational resilience to promote overall financial and banking stability.
The Governor also emphasized the importance of taking a planned approach to UCB’s human resources to ensure that UCB has an adequate quality and appropriate workforce.
Das urged boards to be more proactive in asset liability management (ALM) and the need to manage liquidity risk in a more systematic manner.
He also emphasized that the role of the board is critical to establishing a strong IT and cybersecurity infrastructure and the availability of the required skills at the bank level.
The Governor noted that UCB’s Board of Directors can play a key role in leading change by adapting the bank’s strategy and products to the digital age, fostering innovation and embracing change, while retaining the essence of a collaborative culture.