Corporate Governance in Banking Sector

Good Corporate Governance, It’s about being Proper and Prosper

– Toba Beta

Introduction

A good banking system leads to a higher rate of economic development. Every country is dependent on its “Banking system” as banks play a very crucial role in their upliftment. The growth graph of every country depends upon the relation between “Demand and Supply”. Demand stands for the purchasing power of the consumers whereby Supply stands for the production capacity of producers. In between of this, Banks play a pivotal role in maintaining a balance between the country’s demand and supply. Thus, the proper functioning of the banks is very much needed as they are ultimately responsible for channelling the country’s fund in an efficient and effective manner.

What is meant by Corporate Governance?

The word Corporate or Corporation is derived from the Latin term “corpus” which means a “body”. Governance involves administering the processes and system placed for satisfying stakeholder expectation. The root of the word “Governance” is from “gubernate” which means to steer. When combined, Corporate Governance means a set of systems, procedures, policies,  practices, standards put in place by a corporate to ensure that relationship with various stakeholders is maintained transparently and honestly.

“Corporate Governance involves a set of relationships between a company’s management, its boards, its shareholders and other stakeholders. Corporate Governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” –

                                              G20/OECD Principles of Corporate Governance

Evolution of Corporate Governance in India

Formation of various committee

The first move was taken by the “Confederation of Indian Industry” in the year 1997 towards the implementation of Corporate Governance. The sole object was to develop and promote the practice of Corporate Governance by Indian Companies, be these in the private sector, public sector, banks or financial institution.

Thereafter, SEBI formed a committee under the chairmanship of “Shri Kumar Mangalam Birla” on May 07, 1999 as the first formal and comprehensive attempt to evolve a code of Corporate Governance. Over time, SEBI felt the need to evaluate the adequacy of existing practices and need for incorporating the new practices, on February 08, 2003, it formed the committee under the chairmanship of “Shri N.R.Narayana Murthy” to work for the fulfilment of these objectives.

First move by RBI towards Corporate Governance in Banks

In the year 2001, initial move towards the Corporate Governance can be seen in the report of “Advisory Group on Corporate Governance: Standing Committee on International Financial Standard and Codes” chaired by “Dr.R.H.Patil”. The group suggested the recommendation of bringing the amendment in Company law concerning compliance with Corporate Governance.

Taking this move forward RBI constituted a consultative group of directors of banks and financial institution under the chairmanship of “Dr.A.S.Ganguly” to review the supervisory role of boards of Bank and Financial Institutions.

Ganguly Committee Recommendation

The report of this committee has been benchmarked with International best practices as enunciated in the Basel Paper as well as by other well-recognized committee and advisory groups. Some of the recommendations which are adopted by RBI are –

  • The government, while nominating directors on the Board of PSBs, should be guided by certain broad “fit and proper “norms for the directors based on the lines suggested by the Bureau of Indian Standards.
  • Appointment, Nomination of Independent Director Non-Executive director to the Board of Bank should be made from the pool of talented and professional people maintained by the RBI.
  • Every director should be asked to give undertaking stating that “they have gone through the guidelines and understand their role and responsibility.
  • To ensure strategic focus, there should be separation of Chairman and Managing Director office, especially in respect of large size PSBs.
  • The Board should mainly focus on areas such as strategy development, risk profile, internal control and overall performance.
  • The disclosure of progress made towards the establishment of progressive risk management strategy, exposure to related entities, classification of asset.

Why there is a need for Corporate Governance in Banks?

In all recent times, the country has seen a huge setback due to the failure in the functioning of the Banks. Loss of confidence of investors, customers and weakening of financial position are just a few of the consequences of improper functionality of Banks. Some of the instances can be highlighted where lack of compliance with corporate governance has led to huge loss to the economy as a whole. These are :

AXIS  Bank

Management decided to retain CEO Shikha Sharma for another tenure ending in the year 2021 even though in her presence NPA’s jumped over five-time in two years. The gross bad loans ratio rises to 5.04% from 0.96% [1]in March’2009. Lack of transparency and shareholder interest lead to the failure of Corporate Governance.

ICICI Bank

As soon as news roped in about the lending arrangement between the banks and the immediate relative of Bank’s CEO, there is a loss of thousands of crores of net worth[2] resulting in loss to the investors. These all happened because ICICI Bank and CEO fails to report the conflict of interest to the public and statutory authority.

In such a scenario, it becomes imperative on the part of RBI that it formulate and implement strict code concerning the Corporate Governance.

Compliance of Corporate Governance in Banking Sector

RBI’s requirement

RBI with circular (No 116/08.139.001/2001-02) dated June 20, 2002, issues recommendation to be followed by all banks concerning compliance with Corporate Governance.

These are elaborated here:-

  1. The responsibility of the Board of Director includes overseeing the risk profile, maximization of interest of stakeholders, financial and economic features of the market and competitive environment.
  2. The role and responsibility of Independent director and Non-executive director include the appropriate training for the directors, need-based training programmes/seminar/workshops may be designed by the banks.
  3. Submission of routine information to the Board to enable it to review the various performance areas that may be put to the management committee of the board.
  4. The agenda and minutes of the board meeting should be forwarded to every director within 48 hours of the meeting, preferably by electronic medium.
  5. Following committee should be formed- Shareholders Redressal Committee, Risk management committee, Supervisory committee.
  6. Disclosure and transparency in details of lending to / Investment in subsidiaries, the asset classification of such lending/Investment and conformity with corporate governance standard should be reported to the Board of director at regular interval.

SEBI’s LODR Regulation, 2015: Compliance requirement

SEBI with the adoption of recommendation made by the Committee on Corporate Governance headed by “Shri Uday Kotak”  amended the LODR Regulations, 2015 vide notification dated May,09,2018. Accordingly, all listed entity is required to follow the below-mentioned requirement while reporting compliance with Corporate Governance:

  1. To submit details of – Composition of Board of Directors, Composition of Committees of the Board and Meeting of Board of Directors and Committees, every quarter.
  2. Details related to the Affirmation about AGM stating about the presence of the Stakeholder Relationship Committee at the annual general meeting to be submitted at the end of 6 months after the end of the financial year.
  3. Disclosures on website in terms of Listing Regulations and Annual Affirmation such as “Quorum of board meeting, Recommendation of the board, Meeting of Nomination and Remuneration committee, Meeting of Risk management committee” every year.

NOTE – Non-compliance of the above – mentioned regulation would attract the penalty ranging from Rs 2000/- per day to Rs 5000/- per day.

Other requirements of the LODR Regulation

  1. Every listed entity needs to appoint “Independent Director” who possess integrity and relevant professional expertise.
  2. The Composition of Board should comprise of at least one women director, at least 50% of the director should be “non-executive “ director. Where the chairperson of the Board of Director is “non-executive” director then at least, 1/3th of total Board of director should be Independent director else there should be 1/5th of total Board of director should be Independent director.
  3. A qualified and Independent Audit committee should be formed which should have minimum of 3 directors, and at least 2/3 of total member should be Independent director. It should conduct 4 meetings in a year whereby, time gap between two meetings should not exceed 120 days.
  4. There should be the establishment of “Nomination and Remuneration Committee” which should comprise of at least 3 directors, and at least 50% of the total member should be Independent Director.

Company’s Act  2013, Requirement

It deals with the following compliances concerning Corporate Governance:-

  1. Independent Director.
  2. Women Director.
  3. Audit Committee.
  4. Nomination and Remuneration Committee and Stakeholder Relationship Committee.
  5. Internal Audit.
  6. Serious Fraud Investigation Office.
  7. Corporate Social Responsibility.

Conclusion

Good Corporate Governance ensures greater confidence of stakeholder and proper functioning of the Bank’s operations. It promotes transparency which in turn ensures strong and balanced economic development. Compliance with Corporate Governance leads towards more systematic organizational structure and reporting mechanism. If the financial base of the country, i.e. Banks continue adhering to the requirement of corporate governance, the future seems to be without any cases of scams done by Bank.

References

http://www.ij360mr.com/docs/vol1/ap2013(8).pdf

Podile, Venkateswararao & Sree, Ch. (2015). CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR.

https://www.academia.edu/13095477/Reserve_Bank_of_India_the_Gate-keeper_in_Corporate_Governance

Frequently Asked Questions

  1. What is meant by Corporate Governance? 
  2. Explain the evolution of Corporate Governance?
  3. What is the various requirement in compliance with corporate governance?
  4. Why is the implementation of corporate governance necessary for Banks?
  5. Consequences of failure due to negligence towards the requirement of Corporate governance?

[1] https://economictimes.indiatimes.com/industry/banking/finance/banking/year-of-exits-borrowers-left-as-loans-broke-down-ceos-forced-to-leave/shikha-sharma/slideshow/67253289.cms

[2] https://www.iasparliament.com/current-affairs/failure-of-corporate-governance-icici-case-study

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