Robust corporate framework can build far resilient financial systems: RBI deputy governor MK Jain

Indian banks need to be vigilant, strong and agile in the rapidly changing business environment so that they can identify risks and absorb shocks, MK Jain, deputy governor of the Reserve Bank of India said on Friday while addressing an audience at the India International Centre. Jain also stressed that significant improvements in corporate governance was required in order to develop a more resilient financial system.

“The Reserve Bank has put in place various regulations to improve the governance in banks and make them more resilient. In addition, banks have also made improvements in their risk management capacities,” Jain said. “Yet, the changing operating and risk environment requires banks to be vigilant, strong and agile so as to identify risks early, absorb the shocks and be able to adapt to the newer ground realities.”

Jain also credited a robust governance framework as a precursor to enhancing resilience of any financial institution and that excessive risk exposures, credit losses, liquidity problems and capital shortfalls could stem from weaknesses in corporate governance, compensation policies and internal control systems.


“While high-quality governance acts as a credible defense against risks, past experience suggests that weakness in corporate governance can cause failure of a financial system and may lead to financial instability,” he said. “Given that the sources of future vulnerabilities are hard to predict, banks need to have robust frameworks of risk governance and management to identify and understand emerging risks and their potential impact on the firm.”

Further stressing the need for a robust corporate governance framework, Jain also said that such factors were increasingly becoming a major ask during investment decision-making process and poor corporate governance was often cited as one of the main reasons why investors were reluctant to invest in companies in certain markets.

“It can also explain why, in some economies, the shares of many companies trade at a significant discount to their true value,” he said. “Even better governed companies are "tarred with the same brush" almost a case of guilt by associationx. As such, banks’ ability to raise capital, which is important to improve their absorptive capacity, is also a function of strength of its corporate governance practices.”