Governance Lapses Behind Financial Failures: Why RBI Deputy Governor Swaminathan Janakiraman’s Warning Rings True: Beyond Symbolism to genuine accountability and vigilance

beyond symbolism to genuine accountability and vigilance

When Reserve Bank of India (RBI) Deputy Governor Swaminathan Janakiraman recently cautioned that governance lapses often lie at the root of financial failures, his warning echoed a pattern that India’s financial sector has witnessed repeatedly over the past decade. From infrastructure finance giants collapsing under opaque debt structures to banks failing due to concentrated lending and weak oversight, the common thread has not merely been poor business decisions—it has been failures of governance at the highest levels.

India’s experience with financial scandals such as IL&FS, Yes Bank, and other lending irregularities demonstrates that institutional collapses rarely occur overnight. Instead, they are typically preceded by years of weak board oversight, inadequate risk controls, and a culture where accountability is diluted. Janakiraman’s observation highlights a fundamental truth: financial disasters are often governance failures in disguise.

IL&FS: A Board of Luminaries, A Systemic Collapse

The collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018 remains one of the most dramatic examples of governance breakdown in modern Indian finance. IL&FS was not an obscure financial entity; it was considered a systemically important infrastructure financing institution with deep connections to both the public and private sectors.

Its board was populated with distinguished individuals from India’s corporate and policy circles. Among them were Ravi Parthasarathy, the long-time chairman, Hari Sankaran, Arun K. Saha, Vineet Nayyar, and well-known independent directors such as Lakshmi Vilas Bank’s former chairman N. Seshagiri, G.C. Chaturvedi, and Renu Karnad from HDFC. Institutional shareholders included LIC, State Bank of India, and ORIX Corporation of Japan, which had representation on the board.

Despite this impressive governance architecture, IL&FS accumulated over ₹90,000 crore in debt through a labyrinth of subsidiaries and complex financial structures. Warning signs had been visible for years—rising leverage, opaque project financing, and delayed recognition of stressed assets. Yet the board failed to enforce discipline or challenge management practices effectively.

When the crisis finally surfaced in 2018, it triggered a systemic liquidity shock across India’s NBFC sector. The government eventually superseded the board and appointed a new one led by Uday Kotak. While some executives faced investigations, many board members who presided over the period of reckless expansion faced limited consequences, raising broader questions about accountability at the board level.

Yes Bank: Board Oversight That Failed

The near collapse of Yes Bank in 2020 provided another stark example supporting Janakiraman’s warning. Once celebrated as one of India’s fastest-growing private banks under founder Rana Kapoor, Yes Bank eventually faced a crisis triggered by aggressive lending, underreporting of bad loans, and concentration of credit exposure.

The bank’s board included several prominent figures over the years, including Ashok Chawla, former Finance Secretary to the Government of India, who served as chairman; Brahm Dutt, a former bureaucrat; and other experienced professionals. On paper, the board had the credentials and expertise necessary to ensure strong governance.

However, the board’s ability to restrain management risk-taking appeared limited. Yes Bank extended large loans to stressed corporate groups such as IL&FS, Jet Airways, Essel Group, and Cox & Kings—many of which were already under financial strain.

As the bank’s asset quality deteriorated, concerns grew about the transparency of its financial disclosures. The RBI eventually intervened, imposing a moratorium and orchestrating a rescue led by State Bank of India along with a consortium of other banks.

Although Rana Kapoor was arrested and faces multiple investigations, broader questions remain about the role of board oversight during the years when risk exposures were accumulating.

The Governance Paradox

These cases illustrate a striking paradox. Many of the companies that later collapsed had boards populated by distinguished individuals with impeccable professional credentials. Their presence was meant to ensure oversight, accountability, and adherence to sound financial practices.

Yet the repeated occurrence of governance failures raises uncomfortable questions. Were boards insufficiently informed about the risks being taken? Did they lack the independence necessary to challenge powerful promoters or management teams? Or were governance structures reduced to formal compliance mechanisms rather than active oversight bodies?

RBI Deputy Governor Swaminathan Janakiraman’s warning points precisely to this issue. Financial failures are rarely sudden accidents; they are usually the culmination of governance lapses that persist unchecked over long periods.

Accountability and the Limits of Enforcement

Another troubling aspect of these scandals is the perception that accountability has been uneven. Promoters and executives have faced arrests and legal proceedings in several cases. However, board members—many of whom had oversight responsibilities—have often faced fewer direct consequences.

This gap in accountability creates a moral hazard. If board membership carries prestige but limited liability when governance failures occur, the incentives for rigorous oversight may weaken. Strengthening governance therefore requires not only better rules but also clearer accountability for those entrusted with fiduciary responsibilities.

Strengthening Governance in India’s Financial Sector

India’s regulatory framework has evolved significantly over the past decade. The RBI has introduced stricter fit-and-proper criteria for directors, enhanced disclosure requirements, and stronger supervisory frameworks for banks and NBFCs.

However, governance ultimately depends on culture as much as regulation. Boards must be willing to question management decisions, demand transparency, and intervene when risk-taking exceeds prudent limits.

Janakiraman’s warning serves as a reminder that financial institutions cannot rely solely on regulatory oversight to prevent crises. Governance must function effectively within institutions themselves.

A Lesson Repeated Too Often: Beyond symbolism to genuine accountability and vigilance

The collapses of IL&FS and Yes Bank reveal a recurring pattern: strong reputations and prominent boards do not automatically translate into effective governance. When oversight becomes passive and risk warnings go unchallenged, financial instability becomes almost inevitable.

If India’s financial system is to avoid repeating these episodes, governance must move beyond symbolic board structures to genuine accountability and vigilance. As Swaminathan Janakiraman’s remarks underscore, preventing financial failures begins long before balance sheets collapse—it begins with governance that is willing to act before risks spiral out of control.