The Reserve Bank of India (RBI) has proposed significant governance reforms for Urban Co-operative Banks (UCBs) and Rural Co-operative Banks (RCBs), mandating stronger risk, compliance and audit oversight while also strengthening the process for appointment of Managing Directors and Chief Executive Officers (MDs/CEOs).
Under the draft directions, all co-operative banks will be required to establish independent Compliance and Internal Audit functions headed by a Chief Compliance Officer (CCO) and a Head of Internal Audit (HIA), respectively.
Co-operative banks with total assets of Rs 5,000 crore or above will additionally be required to establish a Risk Management Function headed by a Chief Risk Officer (CRO).
The proposed framework requires the Risk Management, Compliance and Internal Audit functions to operate independently of business lines, remain free from business targets and revenue-generation responsibilities, and have unrestricted access to all business areas and records.
CROs, CCOs and HIAs will functionally report to the Board or the relevant Board Committee while administratively reporting to the MD/CEO. They will also be required to meet the Board at least once every quarter without the presence of senior management.
The draft directions also propose fixed tenures of at least three years for CROs, CCOs and HIAs, with any premature transfer or removal requiring Board approval.
In addition, RBI has proposed the adoption of a Risk-Based Internal Audit (RBIA) framework, under which audit focus will be determined by risk levels, materiality, systemic relevance and supervisory concerns.
In a separate governance measure, RBI has proposed that applications for the appointment or reappointment of MDs/CEOs be submitted at least four months before the expiry of the incumbent’s tenure, along with the required documents through the PRAVAAH portal.
For UCBs, the central bank has also reiterated that appointments, reappointments and termination of MDs/CEOs require prior RBI approval under the Banking Regulation Act.
The draft directions are currently open for public comments and will come into effect after finalisation.