RBI alerts UCB directors about governance flaws and related party loans

RBI alerts UCB directors about governance flaws and related party loans

RBI alerts UCB directors about governance flaws and related party loans

The action is significant given the background of many instances involving directors of different cooperative banks who have been requested by the regulator to take action regarding related party lending.

In recent years, the RBI has taken strong action against cooperative banks that make mistakes.

Urban co-operative banks (UCBs) have been cautioned by a top Reserve Bank of India (RBI) official not to lend money to linked parties, such as senior management and director family, since this is not a sound governance practice.

Lending to connected parties—such as top management and director relatives—is against the law, rules, and best practices for good governance. At a Hyderabad event, RBI Deputy Governor J Swaminathan responded, "These should be avoided." January 24.

The statement takes on more relevance in light of the many incidents involving directors of different cooperative banks who have made related party loans, potentially leading to regulatory action.

The deputy governor said that credit decisions need to be made only on the basis of each case's merits, without reference to or influence from other sources. On January 24, Swaminathan gave a speech at the UCBs Conference on Governance in Urban Cooperative Banks in Hyderabad.

According to the Deputy Governor, the boards of directors of urban cooperative banks, or UCBs, must continuously upskill themselves to meet new difficulties in the sector and maintain a careful watch on the bank's finances and operations to see warning indications of impending danger. ought to be mindful.

The Deputy Governor said, "In addition to being mindful of building up specialization in their credit portfolio, the directors must exercise vigilance with regard to compliance with various legal and regulatory standards of their banks."

With additional severe measures, the RBI has increased its monitoring of cooperative banks in recent years. In FY2023 alone, penalties were imposed on several institutions and the licenses of at least eight lenders were revoked.

Mudhol Cooperative Bank, Milath Cooperative Bank, Shri Anand Cooperative Bank, Rupee Cooperative Bank, Deccan Urban Cooperative Bank, Lakshmi Cooperative Bank, Seva Vikas Cooperative Bank, as well as Babaji Date Mahila Urban Bank are among the institutions that will shut this year.

Further elaborating, Swaminathan encouraged UCBs to have efficient internal audit and fraud detection systems in addition to a strong vigilance system. "The bank should immediately report fraud to the regulator and other relevant authorities," said Swaminathan. Appropriate action should be taken to address the core causes. There ought to be no room for activities with malevolent purpose."

Additionally, according to Swaminathan, directors of UCBs would need to exercise caution on how well their banks are adhering to different legal and regulatory standards.

According to Swaminathan, "The board should discuss the RBI inspection submit a complaint, and the comments are appropriately addressed in a timely manner." Furthermore, for real progress to be made, compliance must be maintained.