Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday cautioned urban co-operative banks (UCBs) against use of innovative accounting practices to camouflage the actual financial position.

At a conference for the directors on the boards of select large UCBs, Das emphasised that the role of directors is very significant in ensuring the integrity and transparency of financial statements.

The aforementioned observations are significant as RBI had come across major financial irregularities, failure of internal control and systems and wrong/under-reporting of exposures under various off-site surveillance reports by the erstwhile Punjab and Maharashtra Co-operative (PMC) Bank in 2019.

The PMC bank was amalgamated with Unity Small Finance Bank with effect from January 25, 2022.

Das underscored the need for board’s involvement in upholding rigorous credit risk management including robust underwriting standards, effective post sanction monitoring, timely recognition and mitigation of incipient stress, rigorous follow up of large NPA (non-performing asset) borrowers for effective recovery, and maintaining adequate provisioning.

‘Strengthen governance’

The Governor stressed that the quality of governance was the most important aspect in ensuring stability of individual banks and urged the directors of UCBs to further strengthen governance practices, especially the three supporting pillars of compliance, risk management, and internal audit.

On the functioning of boards, Das emphasised five aspects – adequate skills and expertise of directors, constitution of a professional board of management, diversity and tenure of board members, transparent and participatory nature of board discussions, and effective functioning of board level committees.

The Governor stressed that the management of the UCBs should enjoy the required autonomy in their functioning.

Das noted that while the UCB sector has displayed improved financial performance at an aggregate level in recent times, concerns and vulnerabilities are seen for certain individual entities.

He highlighted the need for the UCBs to strengthen their financial and operational resilience so as to contribute to the overall financial and banking sector stability.

Digitalisation

The Governor also highlighted the importance of a planned approach towards human resources in the UCBs to ensure adequate quality and right size of manpower in UCBs.

Das urged the boards to be more proactive in asset liability management (ALM) and the necessity of managing liquidity risk in a more systematic manner.

He also stressed that the board’s role is pivotal in establishing a robust IT and cybersecurity infrastructure and availability of requisite skills at the bank level.

The Governor observed that boards of UCBs can play a pivotal role in navigating change by adapting their bank’s strategy and offerings as suited to the digital age, promoting innovation and embracing change, while retaining the essence of their cooperative culture.