RBI strengthens bank board oversight, shifts focus to risk and strategy

MUMBAI: The Reserve Bank of India is pushing bank boards away from routine approvals and towards the decisions that can determine a lender's financial soundness, tightening governance rules as regulatory scrutiny of bank leadership intensifies.

The new framework, announced Tuesday, sets out sharper board responsibility for strategy, risk management and corporate governance while allowing routine matters to be delegated to committees or management. The changes take effect on 1 October.

The move comes amid heightened scrutiny of governance standards at banks. The abrupt resignation of former HDFC Bank chairman Atanu Chakraborty earlier this year has also drawn attention to bank governance.

Chakraborty resigned on 17 March, saying in his resignation letter that “certain happenings and practices within the bank” were “not in congruence” with his personal values and ethics. The remarks raised governance concerns at the bank.

HDFC Bank subsequently appointed law firms Trilegal and Wadia Ghandy & Co to review board-meeting minutes for discrepancies Chakraborty had flagged but not elaborated on, according to a Mint report.

In a 30 March interview with CNBC-TV18, Chakraborty hinted that the “mis-selling” of Credit Suisse perpetual bonds was a point of contention between him and the bank's management.

HDFC Bank has reiterated that Chakraborty “did not mention any happenings and practices which were not in congruence with his personal values and ethics”.

Against that backdrop, the RBI's revised framework seeks to draw a clearer line between what bank boards must own and what they can delegate.

The RBI said the changes are designed to rationalize the large number of regulatory matters that currently have to be placed before boards, giving them more time for “a more focused and qualitative engagement on strategy and risk governance.”

Under the amended directions, boards are expected to oversee the bank's risk management system, policies and strategy, and exposures to related entities, including subsidiaries and lending and investments made to them. They must also ensure compliance with corporate governance standards, including the composition and functioning of board committees and the frequency of their meetings.

The RBI has consolidated the matters that must come before the board and those that can be delegated to board or management committees. Instead of separate RBI circulars prescribing individual board approvals, the regulator has grouped responsibilities into two broad categories: policies requiring board approval and operational matters requiring approval, review or information, with specific items identified for delegation.

The broader message is clear: delegation does not dilute board accountability. The RBI said the board remains ultimately responsible for the bank's business strategy and financial soundness, key personnel decisions, internal organization and governance structure and practices, and risk management and compliance obligations.

Boards must now explicitly define which matters require their approval and which can be delegated, while ensuring sufficient time is devoted to strategy and risk governance.

The chairperson will have primary responsibility for setting board meeting agendas. Boards must also specify the nature and frequency of information they require from management and may seek external reports when necessary.

The RBI is also asking boards to review their own processes—and the work delegated to board or management committees—periodically. Those reviews must examine whether agenda papers are circulated on time, contain adequate information and allow sufficient time for important issues.

The amendment also streamlines regulatory approvals by allowing specialised committees, including audit, risk management and asset-liability committees, to take on several functions. But critical policies on credit, investments, risk management, cyber security, fraud risk management, compensation, compliance, KYC and responsible business conduct will continue to require board oversight.