Audit, risk management of lenders have lapses: RBI
MUMBAI: The Reserve Bank of India (RBI) has, in recent years, observed weaknesses in compliance, risk management and internal audit functions of financial institutions, leading to greater regulatory focus, deputy governor M.K. Jain said.
Jain pointed out areas where such weaknesses were detected. RBI found that some regulated entities delayed or even failed to detect and report non-compliance, Jain said while delivering the keynote address at the Centre for Advanced Financial Research and Learning, a copy of which was posted on the RBI website on Tuesday. Compliance setup, the regulator found, was not resourced adequately with required number and quality of staff in many cases.
RBI observed a disconnect between the risk appetite framework approved by lenders’ boards and their decision-making. There was no guidance from the senior management and this was compounded by improper risk assessment, repeated exceptions to risk policies, conflict of interest especially in related party transactions and absence or faulty enterprise-wide risk management, he said.
The regulator also found that the internal audit process was unable to capture irregularities. Certain areas were not covered by it and compliance and audit functions were not collaborating with each other. “While good corporate governance is essential for all institutions, the governance structure and processes of the banks are expected to be even more robust,” Jain said.
Banks and financial institutions, he said, are different from other business entities in many ways. Their business model is very different from other business entities, enjoy high leverage as they can raise substantial amount of uncollateralized deposits, and perform the function of liquidity and maturity transformation, said Jain.
He said that among things RBI expects from institutions it supervises are effective engagement and support from the top, and the independence of oversight and assurance functions. Jain said that oversight and assurance functions have a key role in value creation for a financial institution, strengthening public confidence, preserving and enhancing its reputation, and maintaining the integrity of its business and management.
“The board should engage with the oversight and assurance functions and assure them of direct and unfettered access. The “tone from the top” would set the pace for a sound organization culture that values honesty and integrity,” he said.
An efficient financial system is crucial to economic development and social well-being of the country, he said.