RBI Governor Reveals Banks Concealing Stressed Assets And Governance Flaws

The Reserve Bank of India has discovered instances of some banks attempting to conceal the true situation of their stressed assets, as well as governance flaws at specific lenders, its governor stated on Monday.

"During the course of our supervisory process, certain instances of using innovative ways to conceal the real status of stressed loans have also come to our notice," Shaktikanta Das stated this during his first address to bank directors at a conference hosted by the RBI.

Das did not specify which bank he was referring to. Instead, offering examples, the governor stated that supervisors had discovered certain instances of sale and buyback of stressed loans between two lenders, constructed transactions with good customers to disguise stress, and issuance of fresh loans near the period of payback.

Das also stated that, despite corporate governance requirements, the RBI has discovered governance deficiencies at certain banks, which have the potential to produce some volatility in the industry.

"While these gaps have been mitigated, it is necessary that boards and the management do not allow such gaps to creep in," he said.

However, the Indian banking system is now strong and stable, with a decent capital-to-risk-weighted asset ratio, low gross and net bad loan ratios, and a healthy provision coverage ratio, according to Das.

"It is in times such as these that complacency may set in," he flagged. "We have to bear in mind that risks often get overlooked or forgotten when things are going well."

As a result, bank boards and top management should maintain a close eye on external threats and the development of internal vulnerabilities, if any exist.

Das noted that the most crucial criterion for ensuring a bank's stability and long-term financial performance is a strong governance framework.

Over-aggressive expansion, under-pricing or over-pricing of products on both the credit and deposit sides, concentration or a lack of proper diversity in the deposit-credit profile, according to Das, can expose banks to higher risks and vulnerabilities.

"RBI has engaged with certain banks on the need to make suitable adjustments in their business strategies where it was observed that over-aggressive growth in certain business segments were creating avoidable vulnerabilities," Das said.