Directors of Urban Co-operative Banks (UCBs) should carefully go through the auditor’s report and ascertain if it is qualified or clean, according to RBI Deputy Governor Swaminathan J.
Further, depositors should be encouraged to become members to improve the capital base of these banks
He observed that the failure in 2001 of a Gujarat based UCB (Madhavpura Mercantile Cooperative Bank) and more recently in 2019 to a Mumbai based UCB (Punjab & Maharashtra Co-operative Bank) attest to the contagion risks posed by even relatively smaller banks.
Financial statements
Swaminathan emphasised that a basic understanding of the bank’s financial statements is absolutely essential for a director.
“The UCBs should explain their accounts to their directors in detail, especially where the bank stands on important parameters such as capital adequacy, liquidity, asset quality and profitability,” the Deputy Governor said at a recent Conference of Governance in Urban Co-operative Banks for UCBs in Andhra Pradesh, Karnataka, Kerala and Telangana held in Hyderabad.
Further, the financial statements should be fully compliant with accounting standards.
He urged the directors to carefully go through the auditor’s report and ascertain if it is qualified or clean. They should engage with the auditors to understand their observations and concerns.
Similarly, this understanding of finance is also relevant for laying down underwriting standards and assessing credit proposals.
The Deputy Governor underscored that Directors should be mindful of buildup of concentration in their credit portfolios and try to diversify the risk, while closely monitoring the large exposures.
Loans to connected parties
“Credit decisions should be solely based on the merits of each case, free from any external influences or considerations.
“Extending loans to connected parties such as relatives of directors and senior management are not in consonance with statutes, regulations, and good governance practices. These should be avoided,” he said.
Swaminathan exhorted Directors to see themselves as trustees of the depositors’ hard-earned savings.
“After all, it is their money which keeps the bank ticking. Encouraging depositors to become members can further enhance their sense of ownership and engagement in the institution’s welfare as well as improve the capital base of the bank,” he said.
The Deputy Governor stressed on the importance of discussing RBI inspection reports in the Board threadbare. The observations should be suitably addressed in a timely manner.
“It should be ensured the same mistakes are not repeated. It would be useful for directors to seek regular updates from the bank on important RBI circulars and instructions.
“This approach not only reinforces the Board’s oversight role but also contributes to a robust regulatory compliance framework,” he said.
