A top Reserve Bank of India (RBI) official has warned Urban Cooperative Banks (UCBs) against extending loans to connected parties such as relatives of directors and senior management saying such actions aren't good governance practice.
"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," J Swaminathan, deputy governor of the RBI said speaking at an event in Hyderabad on January 24.
This comment assumes significance in the backdrop of various cases involving directors of different cooperative banks engaging in related party lending inviting the regulator's actions.
Further, credit decisions should be solely based on the merits of each case, free from any external influences or considerations, the deputy governor said. Swaminathan was speaking at the Conference of Governance in Urban Co-operative Banks for UCBs in Hyderabad on January 24.
Directors on the Boards of Urban Cooperative Banks or UCBs need to constantly upskill themselves to face the fresh challenges in the industry and must pay close attention to the bank's finances and operations to identify early signs of risks, the deputy governor said.
Further, the deputy governor said directors need to exercise vigilance regarding their banks' adherence to various statutory and regulatory requirements besides being mindful of a build-up of concentration in their credit portfolios, the official added.
In recent years, the RBI has strengthened the scrutiny of cooperative banks with more penal actions lined up cancelled the licence of at least eight lenders and fined several banks in FY2023 alone.
Banks that went defunct this year included Mudhol Cooperative Bank, Millath Cooperative Bank, Shri Anand Cooperative Bank, Rupee Cooperative Bank, Deccan Urban Cooperative Bank, Laxmi Cooperative Bank, Seva Vikas Cooperative Bank and Babaji Date Mahila Urban Bank.
Elaborating further, Swaminathan urged UCBs to have a good vigilance system, and effective internal audit and fraud detection mechanisms in place. "When frauds occur, the bank should promptly report to the regulator and other concerned authorities. Root causes should be suitably addressed. There should be zero tolerance towards acts of malfeasance," Swaminathan added.
Further, directors of UCBs must also bear the responsibility of exercising vigilance regarding their banks' adherence to various statutory and regulatory requirements, Swaminathan said.
"RBI inspection reports should be discussed in the Board threadbare, and the observations should be suitably addressed on time. Further, for meaningful improvement the compliance given should be sustained," Swaminathan added.
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