RBI may rationalise board norms, shift focus to strategy, policy

The Reserve Bank of India (RBI) is poised to revolutionise corporate governance in the Indian banking sector by overhauling directives for bank boards, empowering them to shed operational burdens and sharpen their focus on critical policy and strategic decision-making.

The Reserve Bank of India (RBI) is planning to revise and rationalise directions for bank boards to enable them to focus on policy and strategic matters rather than being overburdened with operational issues.

"...to facilitate better utilisation of bank boards' time, after a comprehensive review of all our extant instructions, we propose to revise and rationalise the matters requiring their attention," RBI Governor Sanjay Malhotra said.

"One had been hearing from the boards that a lot of operational matters were also coming to them, as a result of which they were not able to concentrate on real policy and strategic matters.

"So, that's the reason why we have brought this up," Malhotra said.

Addressing Board Overload

This move follows the recent episode at HDFC Bank, where former part-time chairman, Atanu Chakraborty, resigned abruptly, citing certain developments at the bank that were incongruent with his values and ethics.

Sources had said there was a relationship issue between the bank's management and the former chairman, leading to his sudden exit.

That said, the RBI quelled fears, stating there are "no material concerns" on record regarding HDFC Bank's conduct or governance.

The bank remains well-capitalised, with its financial position satisfactory and liquidity adequate.

It also noted that the bank is a Domestic Systemically Important Bank (D-SIB), with sound financials, a professionally run board, and a competent management team.

A senior banker at a state-owned bank said this RBI move is not linked to the HDFC Bank episode, but has been in the works for some time based on feedback from banks that they keep adding more items for boards to oversee.

Similarly, under the Companies Act and LODR (listing obligations and disclosure requirements) requirements, other regulators also continue to expand the list of matters requiring board attention.

As a result, boards have become heavily compliance-driven, the senior banker said.

"One common concern raised with regulators is that, because so many matters are placed before the board, it is not able to focus adequately on strategy.

"Instead, boards are largely occupied with regulatory requirements — what needs to be presented, reviewed, or approved — most of which is compliance-driven," he further said.

New Draft Guidelines

The RBI has released draft guidelines on governance of commercial banks, proposing that boards can delegate certain responsibilities to the board or management committees while retaining oversight of material decisions.

Boards may delegate the review of policies to committees, approving only material amendments, the contours of which must be clearly defined.

The draft norms lay down key principles to guide boards in determining which matters should come before them.

The RBI emphasised that the ultimate responsibility for a bank's performance, conduct, and control rests with the board, even as it may delegate operational aspects to committees or senior management with appropriate reporting structures.

Boards will also be required to clearly define which matters need their approval and which can be handled at lower levels, taking into account statutory and regulatory responsibilities.

At the same time, the central bank has stressed that boards must ensure adequate time is devoted to strategic issues and risk governance.

The framework assigns the chairperson a central role in setting the agenda for board meets, while requiring boards to ensure they receive sufficient and relevant information from management to discharge their duties effectively.

This includes defining the level of detail, frequency, and type of information required, while retaining the ability to seek external inputs where necessary.

Further, the RBI has proposed periodic reviews of board processes, including the nature of matters placed before the board, delegation practices, timeliness of agenda circulation, adequacy of information, and time allocation for critical issues.