‘Supervision must look beyond formal compliance’

PTI

New Delhi

A lightly supervised system may appear efficient for some time because of lower costs and faster growth, but if that growth rests on weak governance, poor credit standards or hidden risks, the eventual cost is borne by depositors as well as the wider economy, Reserve Bank of India (RBI) Deputy Governor Swaminathan J said on Monday.

Emphasising the importance of supervision, Swaminathan said that institutions and firms cannot be understood only through reported numbers. He noted that numbers tell a story, but one must learn to ask what lies behind them. 

"Supervision must look beyond formal compliance. Compliance asks whether the rule has been followed. Supervision asks whether the underlying risk has been understood and addressed," Swaminathan said during a recent lecture. 

Swaminathan explained that audited balance sheets and information memoranda are useful, but they are not the business. "The business is in the factory, on the shop floor, in the market, in the supply chain, in the quality of management, and in the decisions taken. The banker's job is therefore not to be cynical, but to be curious," Swaminathan said.  Swaminathan delivered the 12th G Ramachandran Memorial Lecture at the Madras School of Economics in Chennai.