News | RBI Raises Red Flag on Bank Governance as Competitive Pressures Mount

RBI Raises Red Flag on Bank Governance as Competitive Pressures Mount

News

31 July 2025

2 min read

UBS Forums

The Reserve Bank of India (RBI) has issued a strong caution to banks and non-banking financial companies (NBFCs), highlighting emerging governance concerns driven by growing competitive pressures in the financial sector.

Speaking at the 109th Foundation Day of Karur Vysya Bank, RBI Deputy Governor J. Swaminathan said that some institutions, in their effort to maintain growth and profitability, are engaging in questionable practices such as creative accounting, regulatory arbitrage, and diluted internal controls. He stated that while such actions may help portray short-term success, they risk undermining long-term stability and public trust in the financial system.

“Driven by intense competitive pressures and a desire to project short-term success, the management of certain banks and NBFCs appears to believe that the ends justify the means,” Swaminathan warned.

The Deputy Governor noted that these practices, although not widespread, are concerning enough to warrant supervisory attention. The RBI is now intensifying its oversight mechanisms to ensure better risk management, compliance, and governance standards.

Swaminathan further emphasized that governance in banks must move beyond a box-ticking exercise. He cited instances where board-level strategies failed to translate effectively into ground-level execution, resulting in gaps across credit, risk, and compliance operations. This, he said, reflects a systemic failure in internal controls and accountability.

“Governance is not just about meeting regulatory expectations on paper. It’s about instilling a culture of responsibility, transparency, and ethical conduct at every level,” he added.

To strengthen supervision, the RBI is sharpening its focus on board governance, audit committee functionality, and institutional controls. The central bank aims to reinforce the accountability of boards and senior management in ensuring robust internal systems.

Swaminathan concluded by urging banks to focus not only on financial capital but also on managing trust, reputation, and institutional values. “Every rupee must carry not just interest, but intent,” he remarked.

The RBI's statement serves as a clear signal to financial institutions that growth should not come at the cost of governance, and that ethical banking practices are vital to sustaining long-term financial health and public confidence.