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Transforming Public Sector Banks for a Viksit Bharat
September 12, 2025
Q1. Public Sector Banks have significantly improved their balance sheets. Why should RBI remain concerned?
Answer:
Improved balance sheets create resilience, but they should not create
complacency.
Banking risks are dynamic. Credit growth can accelerate, underwriting
standards can weaken, asset prices can change, technology risks can emerge and
operational vulnerabilities can increase during periods of strong growth.
The appropriate objective is therefore not merely to preserve current
asset quality but to build forward-looking resilience.
This means strong capital buffers, early-warning systems, effective
governance, sound underwriting and operational resilience.
A healthy banking system should be able to support growth without
allowing today's growth to become tomorrow's asset-quality problem.
Q2. We say PSBs should become "enablers of new growth". How
can they expand credit without repeating the mistakes of the past?
Answer:
The key is to move from volume-oriented lending to risk-sensitive,
information-driven credit expansion.
Technology can improve borrower assessment through alternative data,
early-warning systems and predictive analytics. But technology should
complement sound credit appraisal rather than replace it.
PSBs should particularly focus on sectors such as MSMEs, start-ups,
women entrepreneurs and rural enterprises, while maintaining appropriate risk
pricing and credit discipline.
The lesson from the past is that financial inclusion and credit growth
are sustainable only when supported by sound underwriting, monitoring and
recovery mechanisms.
Q3. Why is operational resilience becoming as important as capital
adequacy?
Answer:
Banking is increasingly a 24x7 digital service. A bank can be
financially well capitalised but operationally vulnerable.
A prolonged technology outage, cyberattack, cloud failure or critical
vendor disruption can affect customers, payment systems and confidence. If the
institution is systemically important, the disruption can have wider
implications.
Therefore, resilience needs to be viewed in multiple dimensions: financial
resilience, operational resilience, cyber resilience and governance resilience.
This also requires robust business continuity planning, third-party risk
management, redundancy and testing rather than merely having documented
policies.
Q4. If PSBs collaborate extensively with FinTechs, what should concern
RBI?
Answer:
The collaboration can combine the reach and trust of banks with the
agility of FinTechs. But it can also create new dependencies.
RBI would need to consider outsourcing risk, data governance,
cybersecurity, concentration risk, customer protection and accountability.
A bank should not lose control over a critical function merely because
it is technologically outsourced.
I would therefore favour innovation through partnerships, but within a
framework where the regulated entity retains appropriate oversight and
accountability.
Q5. RBI says "governance must come from within". Can
regulation substitute for governance?
Answer:
No. Regulation establishes minimum expectations and creates external
discipline, but it cannot replace internal culture.
A bank can comply with every prescribed rule and still have weak
governance if its board does not challenge management, its control functions
lack independence, or its employees develop a culture of excessive risk-taking.
Supervision can identify weaknesses and require remediation, but
sustainable governance requires ownership by the board and senior management.
Therefore, I would see regulation and governance as complementary. Regulation provides the guardrails, while internal governance determines how responsibly the institution operates within them.
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