In the book — This Time Is Different: Eight Centuries of Financial Folly, economists Carmen Reinhart and Kenneth Rogoff meticulously document how financial crises, despite their varied contexts, follow strikingly similar patterns across history. From sovereign defaults to banking collapses, a common thread runs through them—each generation convinces itself that past mistakes are irrelevant, only to repeat them under new guises.
The belief that “this time is different” fuels reckless financial behaviour, weak governance, and regulatory complacency, leading to crises that, in hindsight, seem entirely predictable. India’s financial sector is no exception.
The RBI’s scrutiny of private and state-owned banks’ forex hedge positions, overseas borrowings, and deposit-linked exposures, if media reports are accurate,
is a welcome move. If the review uncovers similar discrepancies across institutions, external audits may follow, but they will serve little purpose if banks continue to prioritise short-term profitability over risk prudence. For all the sophisticated models and committees in place, miscalculations of this magnitude raise concerns about whether Indian banks possess the institutional discipline to manage complex financial instruments without regulatory intervention at every stage.
The deeper issue, however, is the regulatory framework itself. In India, financial regulation often focuses on post-facto investigation and penalties rather than preemptive governance enforcement. Even when severe governance lapses occur, regulatory penalties remain woefully inadequate. In global financial centres, fines for governance failures and risk miscalculations run into hundreds of millions or even billions of dollars, creating a genuine economic disincentive for institutions to take reckless bets. In India, penalties are often so paltry that they amount to even less than the legal fees a firm would incur in seeking regulatory guidance on the very same compliance circular that penalises it.
If regulators are serious about preventing the next major crisis, enforcement must shift from merely documenting wrongdoing to actively deterring risk-prone behaviour. This requires stronger governance accountability at the board level, where banks reporting major financial miscalculations or regulatory lapses should face more than just fines. There must be board-level consequences, including mandatory transitions in risk and audit committees, and in severe cases, the concerned operational leader should be required to step down with upto one-year cooling period from the financial sector.
Regulatory stress tests must also evolve beyond routine compliance exercises into real, unscheduled interventions with the power to halt risky financial practices before they spiral into crises. Additionally, regulatory fines should be significant enough to create a genuine economic disincentive, ensuring that regulatory oversight is not just a bureaucratic hurdle but a true check on reckless financial decisions.
Short-termism remains a persistent, systemic issue in Indian banking governance, with business leaders often operating on a “QSQT—Quarter Se Quarter Tak” mindset, prioritising immediate profitability and regulatory optics over long-term institutional resilience. Risk oversight, succession planning, and strategic foresight take a backseat to quarterly earnings, market sentiment, and expedient decision-making.
The fixation on short-term gains not only increases vulnerability to financial miscalculations but also erodes the board’s ability to challenge management on deeper structural risks. Instead of fostering a culture of sustained stability, many boards operate in a reactive mode—intervening only when crises surface rather than preempting them.
Another recurring pattern in Indian banking is the unrelenting push for CEO tenure extensions beyond retirement age. When a bank’s board seeks to prolong the tenure of its leader, it is a tacit admission of failure in succession planning. It is untenable that in a nation of 140 crore people—frequently lauded for producing world-class executives for global institutions—boards struggle to identify even a handful of suitable successors for the country’s banks.
Regulators, instead of enforcing leadership transitions, often play along by approving such extensions. Is it the goodwill of the entity promoter or the perceived talent and influence of the CEO that outweighs regulatory expectations for leadership renewal? The reluctance to transition power not only undermines institutional continuity but also concentrates decision-making in a manner that contradicts the principles of corporate governance.
The increasing regulatory burden on financial entity boards further compounds governance inefficiencies. Board members spend an inordinate amount of time fulfilling compliance obligations, leaving little room for substantive deliberations on risk strategy, succession, or long-term resilience. Regulatory oversight is essential, yet the operational strain of constant compliance leaves boards with diminished bandwidth to scrutinise fundamental business risks. The paradox is evident—regulations intended to safeguard financial institutions may, in practice, be diluting the effectiveness of governance by overwhelming boards with procedural formalities.
Compounding the issue is the sheer inadequacy of time allocated to board meetings. A financial entity of reasonable scale requires at least two full days per quarter to conduct the various board committees and the main board meeting with the rigour such responsibilities demand. Yet, most institutions rush through these critical meetings perfunctorily, often squeezed into the few available hours between the two incoming/ outgoing flights of influential board members. Governance, in many cases, has been reduced to a procedural checkpoint rather than a robust mechanism of oversight and strategic guidance.
Board members, however, would argue that the current sitting fees do not reflect the time they are expected to invest, the depth of expertise they bring, or the scale of risks they are held accountable for. It is a fair contention. But who will amend the corporate laws governing sitting fees? If the financial sector expects its board members to take on greater accountability, then the compensation structure must be revisited. Without aligning incentives to responsibility, the governance deficit will persist, and the very individuals charged with protecting financial institutions will continue to approach their roles with the detachment that the current system inadvertently encourages.
India’s financial system cannot afford to lurch from one crisis to another. Regulators must move beyond retrospective damage control to proactive enforcement, ensuring governance is about accountability, not just compliance. This means sharper penalties, stronger board accountability, and a regulatory framework that deters reckless risk-taking. Without these shifts, systemic cracks will remain—and the next crisis will only be a matter of time.
—The author, Dr. Srinath Sridharan ( @ssmumbai), is a Corporate advisor & Independent Director on Corporate Boards. The views expressed are personal.
Read his previous articles here