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RBI deputy governor warns governance lapses behind financial failures

March 05, 2026 4 min read Economics Polity & Governance GS Paper III
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What Happened

  • RBI Deputy Governor Swaminathan Janakiraman warned that the root cause of financial crises lies in governance failures, not lack of knowledge
  • Speaking at the Third Annual Global Conference of the College of Supervisors (January 2026), he stated that banks cannot treat compliance as a "quarter-end activity" and must maintain operational discipline year-round
  • He highlighted that many financial failures occur when people knew what was going wrong but did not speak up, or when red flags were visible but incentives pushed stakeholders to look away
  • The Deputy Governor emphasized that bank stability depends on operational resilience, data integrity, and third-party dependency management as much as on capital and liquidity
  • He warned that a bank may appear "perfectly healthy on paper" yet be one incident away from severe disruption

Static Topic Bridges

Corporate Governance Framework for Banks in India

Corporate governance in banking refers to the structures, policies, and processes through which a bank is directed and controlled. Given the fiduciary nature of banking (banks manage depositors' money and operate with high leverage), governance standards in banking are more stringent than in other sectors.

  • RBI's key governance guidelines for banks include: Master Direction on Governance in Commercial Banks (2024), Master Direction on Board of Directors (RBI, 2024), and various circulars on risk management, internal audit, and compliance functions
  • Key governance requirements: independent directors must constitute at least one-third of the board; mandatory board committees include Audit Committee, Risk Management Committee, Nomination and Remuneration Committee; "fit and proper" criteria for directors
  • The PJ Nayak Committee (2014) recommended separating the posts of Chairman and Managing Director in public sector banks, establishing a Bank Investment Company (BIC), and reducing government interference
  • The Narasimham Committee I (1991) and II (1998) recommended prudential norms, capital adequacy, and reducing directed lending -- laying the foundation for governance reforms
  • Section 10A of the Banking Regulation Act, 1949 empowers RBI to require banks to constitute board committees

Connection to this news: Swaminathan's warning that governance failures -- not ignorance -- cause financial crises reflects a persistent challenge where formal governance structures exist but cultural and incentive mechanisms undermine their effectiveness.

Basel Framework and Supervisory Review

The Basel framework, developed by the Basel Committee on Banking Supervision (BCBS), sets international standards for banking regulation, supervision, and risk management. India has progressively adopted Basel norms, with RBI customizing implementation for Indian conditions.

  • Basel I (1988): introduced minimum capital adequacy ratio (CAR) of 8% of risk-weighted assets; RBI adopted in 1992, mandating 9% CAR for Indian banks
  • Basel II (2007 in India): three pillars -- minimum capital requirements, supervisory review process, and market discipline
  • Basel III (phased implementation from 2013): enhanced capital requirements, introduced Capital Conservation Buffer (2.5%), Countercyclical Buffer (0-2.5%), leverage ratio, Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR)
  • Pillar 2 (Supervisory Review and Evaluation Process -- SREP) is most relevant to governance -- it requires supervisors to assess internal governance, risk management culture, and the effectiveness of the board
  • RBI's Risk-Based Supervision (RBS) framework evaluates banks on governance, risk management, compliance, and capital adequacy
  • India-specific requirement: minimum CAR of 9% (versus global 8%); additional CET1 requirements for Domestic Systemically Important Banks (D-SIBs)
  • D-SIBs in India (2024): SBI, ICICI Bank, HDFC Bank

Connection to this news: The Deputy Governor's emphasis on "operational resilience" and "data integrity" aligns with the Basel III focus on non-financial risks and the expanded scope of Pillar 2 supervision, where regulators assess qualitative governance aspects beyond quantitative capital metrics.

Financial Sector Failures and Lessons in India

India has experienced several notable financial institution failures that were rooted in governance lapses rather than external shocks, reinforcing the Deputy Governor's warning.

  • Punjab and Maharashtra Co-operative (PMC) Bank crisis (2019): Rs 4,355 crore fraud due to concealed exposure to HDIL; fictitious accounts created to hide NPAs from RBI
  • Yes Bank crisis (2020): excessive concentration of loans to stressed companies; board failed to exercise oversight; placed under moratorium and restructured with SBI-led consortium
  • IL&FS crisis (2018): Rs 91,000 crore debt default; governance failures including board inattention, absence of risk oversight, related-party transactions; triggered NBFC liquidity crisis
  • Lakshmi Vilas Bank (2020): merged with DBS Bank India after governance failures and mounting NPAs
  • Lessons: common governance failure patterns include concentrated lending, opaque related-party transactions, weak internal audit, board passivity, and regulatory arbitrage
  • RBI's Prompt Corrective Action (PCA) framework imposes restrictions on banks showing deteriorating financial health (based on capital, NPA, and leverage triggers)

Connection to this news: The Deputy Governor's observation that institutions can "look perfectly healthy on paper" while being one incident from disruption echoes the PMC Bank and IL&FS cases, where audited financial statements concealed the true state of affairs.

Key Facts & Data

  • RBI Deputy Governor: Swaminathan Janakiraman (appointed June 20, 2023, former MD of SBI)
  • Minimum CAR in India: 9% (versus 8% global Basel standard)
  • D-SIBs in India: SBI, ICICI Bank, HDFC Bank
  • PMC Bank fraud (2019): Rs 4,355 crore
  • IL&FS debt default (2018): Rs 91,000 crore
  • Basel III Pillar 2: Supervisory Review and Evaluation Process (SREP)
  • Capital Conservation Buffer: 2.5% of risk-weighted assets
  • PJ Nayak Committee: 2014 (governance reforms in PSBs)
  • Narasimham Committee I: 1991; Committee II: 1998
  • Banking Regulation Act: 1949 (Section 10A for board committees)