Protect depositors money first: RBI Dy Guv tells banks

• Follow

Making his stand clear in the old debate of depositors or shareholders, Reserve Bank of India deputy governor M K Jain asked the directors of banks to prioritise the interest of depositors over that of the shareholders.

According to a report in The Times of India, while speaking at a conference of directors of banks, Jalan said they have to shoulder significant responsibilities to ensure transparency and responsible banking. He urged the directors to question the management of the respective organisations on risks undertaken by the bank and monitor key risks. The deputy governor also asked them to implement risk mitigation steps.

In order to keep the Indian banking system healthy, efficient and immune to major risks, Jain asked the directors to continuously access the performance of their respective banks, the risks they undertake during the course of business. There was no alternative to remaining vigilant, Jain said.

“Banks are allowed to raise substantial amounts of uncollaterilsed deposits. Unlike other corporates, shareholders provide just 3-4% of funds in banks, and the predominant suppliers of finance are depositors. Second, banks perform the function of liquidity and maturity transformation, which makes their business inherently risky,” Jalan said at the conference, making out the unique case for banks and explaining why depositor interests should get precedence over that of shareholders.

He underscored the fact that directors of banks have a special responsibility in ensuring the long-term viability of banks.

They also have a larger scope and role to ensure sustainable growth of banks that essentially deal with the savings of innumerable common people. Both governance and compliance are touchstones of the performance of the boards of banks, Jalan emphasised.

The conference was arranged by the RBI. The significance of the event lay in the fact that it was the first occasion when the central bank directly communicated with the directors of both private and public sector banks at a gathering.

It has frequently been highlighted that the Indian banking industry have remained unaffected by the jitters in the US and European banking industry or has stayed free from such shocks because of better regulation by the RBI. The other side of the regulation coin is compliance and governance in individual banks.