The frenzy of some of the Urban Co-operative Banks (UCBs) to acquire large corporate exposures, which are beyond their bite size, should be strictly avoided, according to Swaminathan J, Deputy Governor, RBI.
Further, there is a need to closely monitor the existing large exposures.
“Concentration risk whether it be in advances or in funding sources is something that we should be mindful of. Large exposures to a single counterparty or a group of counterparties turning bad can have detrimental consequences,” cautioned Swaminathan at the Conference of Heads of Assurance of UCBs on May 16th.
Referring to RBI’s recent enforcement actions, the Deputy Governor said there is now zero tolerance for poor corporate governance practices such as loans to directors or their relatives.
Highlighting the necessity of meticulous monitoring of risk limits, he said frequent breaches in risk limits, coupled with their non-ratification or their routine ratification, poses substantial dangers to the stability and integrity of financial institutions that extend beyond the immediate financial implications.
“If breaches become normalised or overlooked, employees may perceive risk limits as mere guidelines rather than non-negotiable boundaries, thereby compromising the institution’s overall risk awareness. Therefore, it is imperative to address breaches systematically, conduct thorough investigations, hold staff accountable, and implement corrective measures to fortify the risk management practices,” Swaminathan said.
The Deputy Governor observed that from cyber threats to regulatory changes and from economic uncertainties to technological advancements, UCBs must adapt and stay vigilant, if they are desirous of retaining their relevance in this fast-changing world.
“This is where risk management, compliance and internal audit, come into play. They need to work hand in hand, identifying, assessing, and mitigating these risks, ensuring that their bank remains resilient and prepared for whatever challenges lie ahead,” he said.
Swaminathan emphasised that onsite examinations by RBI are not intended to be fault finding missions and instead to provide an insight into the overall health of the bank.
“They often pick up issues missed by the internal assurance functions and external audit. We would also like you to give due attention to the Risk Assessment Report (RAR) observations and risk Mitigation Plans (RMP) issued by the RBI. To ensure sustained compliance, it is important to address the root cause of the observations,” he said.
Further, there should be no compromise on the agreed timelines for RMPs, and the bank should ensure that all RMP items and RAR observations are comprehensively addressed well before the start of the next inspection cycle.
“Pending compliance paragraphs is not a desirable situation and may be a reflection of the lack of due attention by the management as well as the Board. Such instances can also invite stern supervisory action,” the Deputy Governor said.
