Reserve Bank of India's governor Shaktikanta Das has raised concerns over governance gaps in certain banks despite there being clear guidelines in place for corporate governance.
The governor was addressing directors of banks at a conference organised by the Reserve Bank of India. Pointing out that such gaps have the potential to cause volatility in the overall banking sector, the governor said "It is essential that boards and managements do not allow such gaps to creep in."
Das said that the central bank discovered several instances during the RBI's supervisory procedure when creative methods were employed to hide the true situation of stressed loans.
"To mention a few, such methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress," said Das.
Das further said: "We have also come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another method."
The governor also emphasised that bank board members should not have any conflicts of interest that could impair their independence and objectivity.
"It is the responsibility of the Board to ensure that policies are in place to identify potential conflicts of interest and deal with them," Das said.