India’s banking sector faces renewed scrutiny from the Reserve Bank of India. Following a governance failure at a major private lender, the RBI is stepping up its oversight of board-level operations, treasury management, and compliance protocols across the sector. The intention is clear: prevent governance failures from snowballing into systemic risks.
The trigger was a disclosure by IndusInd Bank in March that it had misjudged hedging costs linked to its foreign exchange derivatives portfolio. The error, uncovered through an internal review of the bank’s Other Asset and Other Liability accounts, showed underestimation of hedging costs for forex transactions spanning five to seven years. These transactions included internal derivative trades linked to foreign currency borrowings and deposits, up to March 31, 2024.
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The estimated financial impact was non-trivial—between ₹1,500 crore and ₹1,600 crore, or 2.35% of the bank’s net worth of ₹65,102 crore as of December 2024. While the sum does not threaten solvency, it raises serious questions about the bank’s risk controls and board oversight mechanisms.
RBI shifts gears on board oversight
The episode has spurred the RBI to recalibrate its supervisory approach. Senior supervisory managers—the central bank’s designated officers for regulated entities—have been instructed to assess not just financial statements, but the quality and substance of boardroom discussions. They are now actively reviewing board meeting recordings, cross-checking them against minutes, and probing whether independent directors raise substantive issues.
Sub-committees of boards are under the microscope too. RBI is evaluating their level of engagement, how dissent is recorded and addressed, and whether committee chairpersons provide meaningful inputs to the full board. The goal is not to micromanage, but to ensure boards function as effective checks on executive action.
Revisiting the governance playbook
In parallel, banks have been directed to reassess their adherence to key governance instruments—the Master Direction on Governance and the Circular on Governance in Commercial Banks. The RBI has warned that compliance must not be reduced to a bureaucratic checklist.
A crucial reform that is now under review is the 2015 circular that scrapped the rigid Calendar of Reviews, which mandated discussion of 21 predefined items at every board meeting. The circular had rightly argued that such an approach diverted attention from strategic matters. Boards were encouraged to determine their own agenda, allowing for focused deliberation on seven critical themes: business strategy, financial performance, risk management, compliance, customer protection, financial inclusion, and human resources.
This shift echoed the recommendations of the PJ Nayak Committee, which had advocated professionalising bank boards and redefining their role. The committee found that boards often spent excessive time on operational issues, crowding out attention to strategy and risk—a dynamic that could lead to subpar returns or increased non-performing assets.
Symptoms of superficial engagement
There is growing evidence that these governance norms have not taken firm root. In 2023, RBI Governor Shaktikanta Das held meetings with the boards of several banks. He flagged persistent issues: key documents with factual errors or missing information, agenda notes circulated too late for proper reading, and over-reliance on PowerPoint presentations. These failings, he warned, turn board meetings into choreographed events rather than forums for genuine debate.
To address these lapses, the RBI is reportedly considering stricter norms that would enforce the timely circulation of comprehensive board materials and encourage deeper involvement of independent directors. The intention is to improve the quality of supervision at the topmost level of management.
Towards strategic accountability
As India’s financial system becomes more integrated with global markets, expectations of governance must keep pace. Boards cannot afford to function as ceremonial bodies weighed down by documentation and routine approvals. They need to play a more proactive role in assessing business strategy, overseeing risk, and ensuring operational integrity.
This requires sharper mandates for sub-committees, more time devoted to risk and compliance discussions, and less preoccupation with procedural matters. The RBI’s supervisory cycle is likely to convey this message strongly in the coming months.
Moreover, India’s growing reliance on digital infrastructure, fintech partnerships, and foreign borrowings makes it imperative for bank boards to move from passive endorsement to active oversight. With market sentiment sensitive to governance signals, a lapse at one bank can quickly become a sector-wide concern.
Raising the governance bar
The RBI’s recent push is both timely and necessary. But for it to be effective, compliance must shift from a culture of minimum adherence to one of strategic accountability. Tighter enforcement of governance standards—ranging from clear documentation to meaningful board engagement—is not a regulatory formality. It is foundational to building a resilient banking sector that can withstand shocks and inspire trust.
In the end, safeguarding the financial system means recognising that boardrooms matter just as much as balance sheets.