RBI Tells Bank Boards to Stick to Their Lanes

Even as the focus was on the monetary policy decisions on Wednesday, attention was also on the developments at HDFC Bank, following the exit of part-time non-executive chairman Atanu Chakraborty.

RBI Governor Sanjay Malhotra addressed this upfront, announcing in his statement that the central bank would issue comprehensive norms to ensure better utilisation of members' time on bank boards by revising and rationalising norms governing their scope. The RBI statement elaborated that this was intended to facilitate more focused, qualitative engagement on strategy and governance.

The RBI’s intent is to confine board focus to policy issues rather than operational matters.

Chakraborty’s resignation letter used vague terms regarding ethics without specifics, sparking a sharp fall in HDFC Bank's share price. In a bid to contain the panic around a bellwether lender like HDFC Bank, the RBI had already issued a statement assuring the public about the state of operations and finances of the country’s largest private bank.

Malhotra reiterated that there was no concern around HDFC Bank.

By specifying that it will issue fresh guidelines on the exact roles directors on bank boards play, the RBI has sent a loud and clear message to non-executive directors and chairpersons on boards: their role is to guide and ask questions, but not to get into operational aspects.

What the draft guidelines attempt is a clear reordering of board priorities. The board is explicitly positioned as an oversight body for risk management, related-party exposures, and governance standards, rather than a forum for operational decision-making. At the same time, it is required to define what matters are reserved for its approval, what can be delegated, and how information flows from management.

The strengthening of the powers of boards of banks had been a gradual process since the Asset Quality Review, and later, following issues at some private banks like YES Bank and RBL Bank, but the intention was never to give non-executive directors the right to enter areas best left to executives and management.

Equally significant is the rationalisation of what reaches the board. The RBI has consolidated a wide range of policy approvals, spanning credit, risk, IT, compliance and customer conduct, while allowing several reviews and operational matters to be delegated to board committees or management. The emphasis is on freeing up board time for strategy and risk governance while firmly pushing execution back to management.

There are well-known instances of board directors and chairpersons meeting operational leaders directly, without consulting the bank's management, creating dual power centres and blurring accountability lines. There have also been instances of non-executive directors attempting to influence credit-related decisions, further complicating the chain of command.

The buck on all operational and executive issues stops with the chief executive officer and managing director. The board has a clearly defined mechanism to ensure compliance and good corporate governance through its various internal sub-committees and demarcated roles. In case there is an issue, as happened with IndusInd Bank, it is the management that has to be held accountable, followed by the board, not the other way around.

The RBI’s push to ensure board-level oversight aims to ensure the right questions are asked at the right forums and the right policies are implemented. It is not meant to create a superstructure over the bank's management.

The RBI is clearly aware of instances of overreach by some non-executive members on bank boards. By stepping in through regulation, it is trying to ensure the right balance between corporate governance and operational autonomy.