RBI Governor Das announces increased scrutiny of bank business models
Review of quality and coverage of branch audits in private banks for risk identification to be done
Reserve Bank of India Governor Shaktikanta Das has revealed that the central bank was now scrutinising Indian banks to identify potential risks in their business models to avoid future surprises.
During Wednesday's speech at a global conference on financial resilience, Governor Das expressed concerns over vulnerable banks' adherence to a suitable business model since the US banking crisis. He warned that business models could create risks in a bank's balance sheet, leading to a more significant crisis. The governor also cautioned that previously perceived safe bank balance sheet areas could be susceptible to severe stress.
Governor Das also focused on operational and organisational resilience, citing cyber risks and risks arising from outsourcing to third parties as the top risks to operational stability. The RBI recently issued comprehensive guidelines on outsourcing information technology services by banks and regulated entities. It has also overhauled its supervisory framework to enhance organisational resilience, taking a keen interest in auditing regulated entities and engaging external statutory auditors. The board of directors will decide on selecting individual branches for audits beginning in the financial year 2023.
Citing the example of the Silicon Valley Bank in the US, which collapsed despite investing in secure instruments due to a mismatch in the duration of deposits and investments, Governor Das said that regulators worldwide are renewing their focus on financial resilience and stability in the wake of the COVID-19 pandemic, the Russia-Ukraine war, and the US banking sector crisis.
“To this end, we have strengthened supervision and regulation of banks and other financial entities in India. The financial strength is linked to a bank's business model, so the RBI is closely examining banks’ business models,” he said.
During the COVID-19 crisis, the RBI went beyond its traditional prudential guidelines, requiring banks to meet capital adequacy and liquidity requirements and urging them to build capital buffers. Governor Das explained that, additionally, the RBI periodically implements macroprudential measures to address system-wide risk build-up. “As a result, the Indian banking system has remained resilient and was unaffected by the banking crises in advanced economies. The banks' capital-to-risk weighted assets ratio is 16.1 per cent, significantly higher than the minimum statutory requirement. Stress tests have also shown that banks will have enough capital even under severe stress,” he said.