‘RBI found gaps in compliance, lender audit functions’

Bombay : The Reserve Bank of India (RBI) has in recent years observed weaknesses in the compliance, risk management and internal audit functions of financial institutions, which has led to greater focus on regulation, Deputy Governor MK Jain said.

Jain highlighted areas where such weaknesses were detected. RBI has found that some regulated entities have delayed or even failed to detect and report non-compliances. The compliance setup, the regulator found, was not adequately resourced with the number and quality of staff required in many cases.

He had delivered the keynote address at the Center for Advanced Financial Research and Learning (CAFRAL) on March 10 and a copy of the speech was posted on the RBI website on Tuesday.

Jain said RBI has observed a disconnect between the risk appetite framework approved by lenders‘ boards and their actual business strategies and decision-making. He pointed out that there was a lack of direction from senior management, poor risk assessment, repeated exceptions to risk policies, conflicts of interest, especially in related party transactions, and a Absent or defective enterprise-wide risk management.

The regulator also found that the internal audit process was unable to detect irregularities. Some areas were not covered and the compliance and audit functions did not work together.

“While good corporate governance is essential for all institutions, banks’ governance structure and processes should 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, enjoys high leverage as they can raise a substantial amount of unsecured deposits and perform the function of liquidity and maturity transformation, Jain said.

He said that among the things RBI expects from the institutions it oversees are effective engagement and support from the top, as well as independence of oversight and assurance functions. Jain said supervisory and assurance functions play a key role in creating value for a financial institution, building public trust, preserving and enhancing its reputation, and maintaining integrity. of its activities and management.

“The board should engage with oversight and assurance functions and ensure direct and unfettered access to them. The “top tone” would set the tone for a strong organizational culture that values ​​honesty and integrity,” he said.

According to him, an efficient and dynamic financial system is crucial for the economic development and social well-being of the country.

“Effective internal defenses will help build organizations that are strong, resilient, disciplined and reaping the benefits of sustained growth and customer trust. It will also prevent surveillance actions and subsequent reputational risks should transgressions be detected,” he said.

Jain said that while the RBI has deployed various tools at its disposal to maintain the stability of the financial system, individual financial institutions, especially banks, should be alert to the economic impact of such risky events and take adequate action. to maintain their resilience.

“Even though high quality governance builds resilience, poor corporate governance is a source of risk for financial institutions as well as the financial system,” he said.

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About Jermaine Chase

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