Reserve Bank of India Governor Shaktikanta Das on Thursday said businesses should avoid having an aggressive short-term reward-seeking culture without considering the build-up of excessive risks in their balance sheets.
Risk-taking is the essence of doing business, Das said, emphasising that companies need to carefully weigh the upsides and downsides of every risk before embarking upon it.
"Businesses should avoid aggressive short-term reward-seeking culture without regard for the build-up of excessive risk in the balance sheet," Das said while delivering a speech on Indian Business: Past, Present and Future.
He was speaking at the Iconic Week celebration as part of the 'Azadi Ka Amrit Mahotsav', to mark the 75th anniversary of Independence, organised by the Central Board of Indirect Taxes and Customs (CBIC).
The common characteristics of some of the inappropriate business models or strategies that have come to the RBI's notice include inappropriate funding structure and building asset-liability mismatches, which are highly risky and not sustainable, he said.
Besides, unrealistic strategic assumptions, particularly excessive optimism about capabilities, growth opportunities and market trends may lead to poor strategic decisions that imperil business model viability and over-focus on business model viability, he noted.
The governor said the single most important aspect that determines the long-term success of a business is corporate governance.
The thrust of sound corporate governance is to help build an environment of trust, transparency and accountability in business entities, which are prerequisites for fostering long-term investment, business stability and integrity, Das said.
"It is important to remember that trust is the most valuable asset of a business, and good governance aims to protect and preserve that trust in the organisation," he added.
Das said good governance entails effective and collective oversight by the board and senior management of a company, which would also include control layers of risk management and internal audit.
These need to be based on a proper risk appetite with the purpose of inculcating appropriate risk culture.
"Ethical conduct, accounting transparency and appropriate business models are various components of the broader governance framework. Organisational culture can exert substantial influence on both ethical conduct and transparency practices," he noted.
He said the RBI has mandated a host of disclosure for its regulated entities to ensure that they make full disclosure of all material information in their financial statements.
Das further said businesses are going through a redefining phase and adapting to the new realities emerging from the pandemic.
The adoption of digital technologies and Artificial Intelligence (AI) is getting accelerated across firms, businesses, and sectors. These disruptive technologies offer opportunities to young enterprises to create their own niche in markets dominated by incumbents, he said.
A reflection of this is seen in the emergence of several startups in the Indian business landscape, as young entrepreneurs experiment with ideas in digital payments, online retail, on-demand delivery, education, software and more, the governor added.
The number of unicorns, or new businesses valued at over USD 1 billion, is rising very fast, he said, adding that these startups are supported by a new ecosystem of the angel and venture funding, incubators and accelerators – as well as new patterns of consumption in society.
"A word of unsolicited advice to these young entrepreneurs and start-ups: they should constantly evaluate the build-up of risks and vulnerabilities in their businesses.
"I recognise that many of them may already be doing it and risk-taking is a part of their business model, but nonetheless these are things which should always be kept at the back of one's mind for long term sustainability of any business," Das said.
He said Indian business is now at a critical juncture with both opportunities and challenges.
The macroeconomic and geopolitical environment is fast-changing and there is a greater need to remain alert, the governor noted.