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October 22, 2001
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RBI to set up group to review role of bank boards

The Reserve Bank of India on Monday said that it proposed to set up a group of directors of commercial banks and financial institutions to suggest measures to strengthen the supervisory role of bank boards.

"Recent events have brought to the fore the need for boards of banks and financial institutions to exercise proper vigilance and supervision over the functioning of commercial banking and other financial institutions," it said.

The RBI said in some cases recently, the policy laid down by the bank boards was either flouted or the board itself failed to lay down "appropriate internal guidelines for minimising risks."

"If problems of the type, which have surfaced recently, are to be avoided in the future, within the framework of a deregulated and liberal financial system, the role of boards becomes crucial," said the central bank in its mid-term review of monetary and credit policy.

The RBI expressed concerns over involvement of a few banks in "providing substantial support to a few stock-broking entities, contrary to RBI guidelines and normal prudential requirements."

The Indian financial markets were rocked by a blizzard of allegations of bank-broker nexus in March. The benchmark Bombay stock exchange index had crashed by over 17 percent as investigations revealed that some "bull operators" had colluded with banks to rig the market.

"Fortunately, so far as the banking sector is concerned, the unethical and unwarranted lending practices on a significant scale were confined to only a few relatively small private sector banks, and one fairly large urban cooperative bank," the RBI said.

"As such, it was possible, through temporary and limited liquidity support measures, to avoid the contagion spreading from their activities in the equity market to the banking sector as a whole or to other important segments of the financial sector.

"Nevertheless, the recent experience in equity market, and its aftermath, have thrown up new challenges for the regulatory and supervisory system as well as for standards of corporate governance in banks."

The RBI said it proposed to further strengthen monitoring and supervisory machinery and procedures, in consultation with banks and other financial institutions, for taking swift action against defaulting entities.

Indo-Asian News Service

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