MUMBAI: Stressing the importance of ethical conduct of banking for their long-term health and stability, the Reserve Bank governor Shaktikanta Das has warned bankers against misselling, opening accounts without proper KYC verification/documents and other unethical practices.
The governor has also urged bank boards to proactively manage concentration risks by monitoring portfolios, identifying over-concentration, and addressing potential vulnerabilities.
One way to address the malaise of misselling is to “carefully structure the incentives of banks’ sales staff,” the governor told a conference of directors of private sector banks here Monday.
"Unethical practices, such as mis-selling of products or the opening of accounts without proper KYC verification need to be curbed. Staff incentives should be carefully structured to avoid encouraging mis-selling or unethical practices," Das told the bankers.
Further explaining his concerns, the governor said, “While such practices may yield short-term gains they ultimately expose the bank to significant long-term risks, including reputational damage, supervisory scrutiny, and financial penalties.”
Concerns over mis-selling in the financial sector are not new, even the last economic survey noted that the issue was rampant in the insurance sector and couldn’t be dismissed as a few rogue agents. The economic document highlighted the need for prompt and reasonable claim settlements and a lower rejection rate to boost insurance penetration.
While referring to financial product misselling, the survey said that misselling and misrepresentation need acknowledgement, with firms compensating for consequential losses. This practice is important for stockbroking, fund management, banking, and insurance firms, the survey added.
The governor also urged boards of banks to proactively manage risks by monitoring portfolios, identifying over-concentration, and addressing potential vulnerabilities. He emphasised the need to strengthen internal governance to curb unethical practices and adapt to evolving challenges like technological advancements and climate change. He also highlighted the banking sector's strength while advocating for leveraging favourable conditions to enhance resilience and sustainability.
Boards need to continuously assess external factors like regulatory changes, shifting market winds, overall macroeconomic changes and advances in technology, he said.
"Boards should also be fully cognisant of the organisation's internal strengths, vulnerabilities, and operational conditions so that they have a clear situational awareness,” Das said, adding boards must be cognizant of build-up of concentrations in their business model.
Excessive reliance on specific sectors, markets, or customer segments can expose the bank to amplified risks, particularly in times of economic stress or industry shifts, he said.
"Boards can play a proactive role by regularly monitoring the bank's portfolios, identifying potential areas of over-concentration, and taking pre-emptive steps to maintain a balanced approach," Das added.
The boards, he said, must also remain vigilant to operational risks, particularly those arising from IT outsourcing and reliance on third-party vendors.
Stating that our banking sector remains strong and stable, he said, “all the financial indicators have improved since we met in May last year, reflecting the efforts of the various participants of the banking sector, including their management and boards. To keep the resilience of the banking system intact, the governor emphasised that strong fundamentals ought to be leveraged to reinforce and fortify the defences.
"Good times, after all, are the best times to reinforce resilience and grow sustainably," he added.
Cautioning lenders against possible concentration risks, Das asked banks to ensure that there is no excessive reliance on specific sectors, markets, or customer segments that can expose them to amplified risks, particularly in times of economic stress or industry shifts.
“Boards of banks must move beyond traditional oversight roles and embrace agility, foster innovation, and ensure sustainability and adaptability to today’s dynamic environment,” the governor said.
Underlining that boards have to adopt a proactive approach in identifying and addressing potential challenges, he said such an approach will necessitate a clear understanding of both the external conditions as well as the internal currents within the organisation.
“Boards must continuously assess external factors like regulatory changes, the shifting market winds, overall macroeconomic changes and advances in technology. They should also fully be cognizant of the organisation’s internal strengths, vulnerabilities, and operational conditions so that they have a clear situational awareness,” the governor said.
Further, Das also said boards have to actively safeguard the independence of key functions such as risk management, internal audit, and compliance to ensure that the connected teams are adequately resourced with skilled staff and are given due prominence within the organisation.
“The flexibility and space available to banks for formulating their internal board-approved policies in line with regulatory expectations need to be used with utmost prudence, especially when it has a bearing on customers,” Das said, adding boards should give a close look at service charges and penalties when they are treated as avenues of profit or when forced bundling of products is done, or when disclosures to customers are non-transparent or selective.