The role of independent directors (IDs) on the boards of Indian private sector banks is once again under the scanner following a serious governance lapse at IndusInd Bank. A forensic audit revealed an accounting discrepancy estimated between $175 million(₹1,452.5 crore) and $230 million(₹1,909 crore), stemming from undisclosed derivative exposures—triggering alarm within both regulatory circles and capital markets.
The episode has highlighted systemic weaknesses in risk oversight, board accountability, and the effectiveness of IDs, sparking wider conversations on the role these directors play in ensuring robust corporate governance in India’s financial institutions.
Governance Failures and RBI’s Growing Concern
The Reserve Bank of India (RBI) has taken swift action in response to the IndusInd crisis, instructing the board to assess individual accountability, including the top leadership. The regulator has also asked the bank to consider external candidates for the CEO and COO positions. In the interim, an executive committee has been tasked with handling the bank’s day-to-day operations, indicating a strong regulatory push toward restoring governance credibility.
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A forensic audit conducted by Grant Thornton flagged a series of failures in accounting controls, weak board-level monitoring of risk disclosures, and inadequate internal communication. The audit findings suggest that the board, particularly its independent directors, failed to identify and question risky derivative exposures that should have raised red flags.
These developments reinforce the RBI’s increasing emphasis on boardroom accountability and the need for independent, well-informed oversight that goes beyond rubber-stamping management decisions.
Independent Directors: Ill-Equipped for Complex Financial Oversight?
Industry experts and market watchers have voiced concerns about the capacity and effectiveness of IDs in India’s private banking landscape. Many independent directors, particularly those without a strong financial background, struggle to comprehend complex treasury and risk operations, which limits their ability to challenge executive decisions meaningfully.
While the current “fit-and-proper” norms emphasize the exclusion of individuals with criminal backgrounds or conflicts of interest, they do not necessarily ensure financial literacy, governance experience, or time commitment—key traits required for effective board participation in high-stakes financial institutions.
According to insiders, IDs often rely heavily on management presentations, lacking the time or tools to independently verify the accuracy or completeness of the data presented. The IndusInd case is a cautionary tale of how such passive participation can lead to massive financial and reputational damage.
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Nayak Committee’s Vision Gaining Renewed Relevance
The crisis has reignited interest in the P.J. Nayak Committee’s 2014 recommendations on improving governance in Indian banks. Among other proposals, the committee advocated for the appointment of a Lead Independent Director (LID) who would act as a counterweight to the CEO and executive team, as well as raising the bar for director appointments through more stringent competency-based inclusion norms.
These recommendations, largely left unimplemented, are now gaining traction in regulatory and governance circles. Many suggest that the IndusInd episode could be a turning point, compelling both regulators and bank boards to redefine the responsibilities, engagement, and selection criteria of independent directors.
Going forward, the RBI is expected to tighten its supervisory approach to board governance. Independent directors will likely be held to higher standards of financial diligence, active participation, and accountability, making their roles more demanding but also more crucial to maintaining public trust in private banking.