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Informist, Monday, Nov. 18, 2024

 

--RBI Das: Noticed bks misclassifying customer queries, rejecting grievances 

--RBI Das: Banks need to ensure 3rd-party relationships thoroughly assessed 

--RBI Das: Bank boards must be vigilant to IT outsourcing operational risks 

--RBI Das: Excess reliance on some sectors to expose bks to amplified risks 

--CONTEXT: RBI Governor Das' comments at conference of directors of pvt bks 

--RBI Das: Bank boards must recognise build-up of concentration in business 

 

NEW DELHI - Urging the boards of banks to be cognisant of the build-up of concentrations in their business model, Reserve Bank of India Governor Shaktikanta Das said on Monday that excessive dependence on specific sectors can expose banks to heightened risks in times of economic stress. 

 

"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," Das said in his address at the conference of directors of private sector banks. "For instance, as you would be aware, seeing a build-up of concentration across certain loan segments, the Reserve Bank took a few counter-cyclical measures last year." 

 

In November last year, the RBI acted to clamp down on the rapid growth seen in some segments of personal loans. The measures included an increase in risk weights on banks' personal and credit card loans and a double-whammy for non-banking financial companies in the form of an increase in the risk weights on banks' exposures to them as well as risk weights for NBFCs' own unsecured loans. In September, the central bank also advised lenders to comprehensively examine their gold loan policies and processes after its review revealed several irregularities in the same. 

 

"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," Das said. Citing banks' increasing reliance on external service providers for key operations, the governor said that banks' boards must be vigilant to operational risks, particularly those arising from information technology outsourcing and reliance on third-party vendors. 

 

Das mentioned the outages related to products of global cybersecurity firm CrowdStrike in July that adversely affected several companies across different industries worldwide. "Therefore, it is necessary to ensure that third-party relationships are thoroughly assessed, monitored, and governed with a focus on security and resilience," he said. 

 

It is necessary to continuously assess external factors like regulatory changes, shifting market winds, overall macroeconomic changes and advances in technology, Das said and urged the boards of banks to be fully cognisant of the organisation’s internal strengths, vulnerabilities, and operational conditions, so that they have a clear situational awareness. "Such an approach would enable the Board of Directors to properly guide the management to be well-prepared to weather unexpected challenges and navigate toward sustainable growth," he said. Das also highlighted the need for banks to balance digital innovation with security and stability. 

 

Further, the governor also spoke at length about the need for banks to keep customers' needs at the forefront, flagging instances of complaints being misclassified as customer queries, and rejected grievances not being escalated to the internal ombudsman of banks. Das also said boards of banks should have a close look at service charges and penalties in cases when they are treated as avenues of profit or when forced bundling of products is done, or times when disclosures to customers are non-transparent or selective.

 

Das said there is still a significant potential to improve financial literacy among customers, particularly for the marginalised, less savvy, and rural population. "These groups often struggle to navigate the complex financial landscape and are more vulnerable to usurious interest rates, fraud, and other unfair practices."  

 

The governor also urged banks' boards of directors to focus on strengthening the internal governance framework, and highlighted that unethical practices, such as mis-selling of products or the opening of accounts without proper know-your-customer verification need to be curbed. 

 

Das asked boards of banks to be considerate, well-informed and open to contrarian views. He also urged banks' managing directors and chief executive officers to ensure that the board is given all the requisite information in a timely manner, and that meeting agendas are circulated well in advance with adequate background information.  End

 

Reported by Pratiksha

Edited by Vandana Hingorani

 

 

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