What will it take to sustain financial stability? This question is particularly pressing for regulators today. While India’s financial system has shown resilience, unexpected “black swan” events continuously disrupt the financial services ecosystem. Assessing financial stability risks proactively and preempting anomalies is crucial. Reliance solely on numbers—such as capital adequacy, asset quality, and liquidity ratios—fails to capture the complete picture. A deeper understanding is rooted in governance, which not only reflects the current state of an institution but also its direction.
A weakened board that fails to ask pertinent questions, unexamined related-party transactions, and risk committees that merely exist in name can significantly impact an institution’s financial health. Erosion of trust occurs long before numerical indicators show stress, exemplified by a trust deficit seen in the financial services ecosystem over the past two decades. Once confidence in an institution is compromised, a liquidity crisis can escalate into a solvency crisis, necessitating regulatory intervention.
Shapers of Governance
The governance framework within Indian finance differs across institutions and is largely influenced by regulatory mandates. The Reserve Bank of India (RBI) prioritizes prudential soundness and systemic stability. Its interventions—capping tenures and compensation for bank CEOs and mandating independent compliance functions—aim to mitigate the risks that can accumulate within institutions.
On the other hand, the Securities and Exchange Board of India (SEBI) strives to enhance transparency and market integrity. Its reforms regarding independent directors, related-party transactions, and ESG (environmental, social, and governance) disclosures aim to bolster investor confidence and enhance board accountability.
The Insurance Regulatory and Development Authority of India (IRDAI) seeks a balance between consumer protection and solvency. Its initiatives emphasize stronger risk committees and policyholder-centric disclosures, underscoring that insurers must operate not only as financial institutions but also as custodians of public trust.
Together, these regulations signal that governance is essential for maintaining trust and resilience, and must be regarded as a leading indicator of financial health. This is evident in measures such as:
- The RBI’s focus on chief compliance officers, board accountability, and fostering a culture of risk awareness.
- The RBI’s requirement that compliance heads report directly to the board, emphasizing governance’s critical importance, free from operational interference.
- A scale-based regulatory framework linking governance obligations to systematic importance for non-banking financial companies (NBFCs)—larger entities carry greater responsibilities as governance failures at scale can lead to widespread shocks.
- SEBI’s stricter norms on related-party transactions, reflecting a proactive shift in governance within capital markets. Investors, both domestic and international, regard these actions as indicators of India’s commitment to credibility and trustworthiness.
While regulators actively define governance standards, the onus of implementing these principles falls to the boards of directors within institutions. Boards must navigate their oversight responsibilities without encroaching on operational duties and remain vigilant for signs of cultural decline within the organization, acting swiftly when necessary.
Policy Priorities
Policies should frame governance as a forward-looking measure essential for stability. Key components include:
- Monitoring board independence, audit quality, and risk oversight in conjunction with financial ratios to establish early warning systems.
- Creating standardized governance reporting across banks, NBFCs, and insurers to facilitate fair comparisons and assessments of contagion risks within the financial services ecosystem.
- Evaluating board responses to disruptions—such as cyber breaches, ESG gaps, group defaults, and risk failures.
- Addressing weak oversight with the same urgency as inadequate capital buffers.
Ultimately, governance can serve as a reliable leading indicator only if there exists a collaborative relationship between regulators and the entities they oversee. A consultative approach will significantly enhance the effectiveness of governance efforts in ensuring financial stability.
(The writer is Partner and Financial Services Risk Advisory Leader, Grant Thornton Bharat.)
Published on November 10, 2025.
