mahesh kumar jain : governance and prudential supervision of financial institutions - recent initiatives address by mr mahesh kumar jain, deputy governor, of the reserve bank of india, at the business standard banking, financial sector and insurance ( bfsi ) summit, 2 november 2021. * * * inputs received from shri rohit jain, shri ajay kumar choudhary, dr pallavi chavan and shri nethaji bhudevan of the department of supervision are gratefully acknowledged a very good evening to all the distinguished dignitaries and participants at this annual bfsi summit organised by the business standard. the summit has over the past few days seen excellent discussions on several topical issues related to the banking and financial sector and generated some very useful insights. 2. the topic for today ’ s discussion is ‘ bank privatisation : undoing 1969 ’, which is one of the most widely debated issues for long. the detailed deliberations on the topic are scheduled separately by a panel comprising of eminent personalities. the reserve bank ’ s regulatory and supervisory approach has largely been driven by ownership neutral approach with focus on ensuring financial stability and resilience of its financial entities. banking practices evolved rapidly post liberalisation. the ever changing financial landscape of the country and advent of information technology posed newer challenges for the banks as well as its regulator and supervisor. banks being the engine of growth for the indian economy, quickly adopted to this new reality of competitive environment and resorted to various new practices to maintain their bottom line. the adoption of new business models without adequate risk management and weakness in internal controls at times resulted in weak underwriting standards. the adverse developments in a few regulated entities in the past exposed some fault lines, primarily in terms of inadequate governance, inappropriate business model and weak internal assurance functions. rbi, therefore, undertook a review of its approach towards supervision as well as the existing practices in supervised entities ( ses ) to identify the root causes for these gaps. accordingly, the supervisory approach was reworked out in recent period to bring more focus on addressing these weaknesses. 3. in my address today, i would therefore like to talk about the changes in our expectations from financial entities along with the changes we brought about in our supervisory approach. keeping in mind the overall objective of supervision i. e “ ensuring the safety, soundness and resilience of financial entities, thereby protecting the depositor ’ s interest and maintaining financial stability ”. governance 4. i would like to begin with the issue

of supervision ( dos ) was created bringing all ses, namely, scheduled commercial banks, nbfcs and ucbs under one umbrella. unifying the supervisory functions shall reduce the supervisory arbitrage and information asymmetries across ses and address the complexities arising from their interconnectedness. this will also help in the holistic understanding of systemic risks. steps have been taken to improve the supervisory function through better capacity building and skilling of supervisors and for this purpose a separate college of supervisors ( cos ) has been set - up which is conducting extensive training programs in different areas. supervisory specialisation is also being reinforced by way of creating specialised divisions for risk - based supervision of kyc / aml risk, data analytics, cyber security and it examinations, among others. a supervisory action framework has also been put in place which provides for graded early supervisory action depending on the frequency and severity of breaches identified. ( b ) strengthening sound governance and internal controls 1. emphasis on risk culture 9. as banks are in the business of taking risks, sound risk culture lies at the heart of every decision that they take. in alignment with global developments, reserve bank too has made risk culture and business model analysis as part of its supervisory assessment. the focus has been to ensure that entities put in place a well - defined risk appetite framework, and business decision making is broadly in alignment with their risk appetite and risk bearing capacity. 2. strengthening the assurance function 10. reserve bank attaches a lot of importance to the effective functioning of internal assurance functions in its financial entities and has issued revised guidance for concurrent, internal, as well as external audits in banks. the guidelines are expected to ensure that these audits act as an 2 / 4 bis central bankers'speeches effective early warning, give greater clarity on supervisory expectations, avoid conflict of interest, provide sufficient authority / resources / independence to these functions, among others. 3. compliance function 11. the compliance function in a bank is an integral part of corporate governance, as it can affect the bank ’ s reputation with its shareholders, customers, employees and the markets ( bis, 2005 ). the recent guidance by the reserve bank on compliance function casts responsibility of the compliance culture and management of compliance risk explicitly upon the board. the guidance advises banks on laying down a board - approved compliance policy, well - defined selection process for chief compliance officer ( cco ), a fixed tenure to ccos, and requisite authority. reserve bank would expect