Mumbai: Reserve Bank of India Deputy Governor M. Rajeshwar Rao today issued a strong warning to banks, NBFCs and cooperative financial institutions, stating that poor governance and weak internal controls remain the single biggest cause of financial failures and crises in the Indian financial system.
Speaking at a national conference on banking supervision and governance organised by the Indian Institute of Banking & Finance (IIBF), the Deputy Governor said:
“Time and again, post-mortem reports of failed or stressed institutions reveal the same pattern governance lapses, ever-greening of loans, inadequate risk assessment, weak board oversight, and compromised internal audit functions. Unless these root causes are addressed frontally, no amount of regulation or capital infusion can prevent recurrence.”
Key Warnings & Observations from the Deputy Governor
- Governance, not regulation, is the weakest link
- Most stressed assets originate from poor credit underwriting, conflict of interest, and override of internal controls — issues that regulation alone cannot fix.
- Board & Top Management Accountability
- Boards must move beyond “box-ticking” compliance and actively challenge management on risk appetite, stress testing and conduct issues.
- Independent directors should be empowered and held accountable.
- Cooperative Banks & NBFCs Under Special Scrutiny
- Recent failures in urban cooperative banks and some NBFCs were directly linked to promoter overreach, connected lending and falsification of books.
- RBI has intensified on-site inspections and is now asking boards to personally certify key risk & audit reports.
- Technology & Cyber Risk Governance
- Increasing reliance on fintech partnerships and digital channels has created new vulnerabilities.
- Institutions must have board-approved IT & cyber risk frameworks with regular independent assurance.
- Early Warning Signals Being Ignored
- Many institutions continue to delay recognition of stress despite RBI’s early warning signals (EWS) framework.
- “Wilful blindness to red flags is as dangerous as wilful fraud,” the Deputy Governor remarked.
RBI’s Recent Actions on Governance
- Strengthened fit & proper criteria for directors and CEOs
- Introduced mandatory Chief Risk Officer role with direct reporting to the board
- Enforced stricter internal audit standards and whistle-blower protection
- Launched Board-approved culture & conduct risk frameworks for large banks and NBFCs
- Increased penalties for governance failures (several NBFCs and co-op banks penalised in 2025)
Industry & Market Reaction
- Banking stocks traded flat-to-negative after the speech, with PSU banks under slightly more pressure.
- Analysts view the remarks as a continuation of RBI’s tough supervisory stance rather than signaling any imminent large-scale action.
Conclusion
The Deputy Governor’s blunt message is clear: while regulation can set guardrails, only strong, independent and accountable governance can prevent financial failures. With India’s financial system growing rapidly, the RBI is doubling down on making governance the cornerstone of stability sending a firm signal to boards, promoters and management teams across the sector.
