CORPORATE GOVERNANCE & BUSINESS ETHICS

CORPORATE GOVERNANCE IN BANKS & RBI

Arun Kumar SinghUmesh Nayaka

• Corporate Governance : It is globally practiced as an ethical, board driven policy prescription that can put companies on a sustained growth trajectory having potentiality to contribute substantially to the society.

• Corporate governance occupies a prominent position in modulating the conduct of the companies who raise funds through equity market.

• Public listed companies, financial institutions, banks and other corporate accessing funds from public have to follow rigid discipline in its governance, more so in the application of funds to protect the long term interests of the organizations.

Corporate Governance

Corporate Governance in Indian Banking Sector • Critical because => Integral part of the economy of the country = failure in a bank might have a direct bearing on the

financial health of the country.

• Bank dominated Indian financial system effective financial intermediation is the life line of sustainable development of the economy.

• A banking corporation is a congregation of various stakeholders:

1. Customers

2. employees

3. Investors

4. Vendor partners

5. Government

6. Society.

• A bank should be fair and transparent to its customers and stakeholders in all its transactions.

• Hence establishment of a high standard of corporate governance is necessary for consistency in economic development.

The Reserve Bank of India

• The Reserve Bank of India is India's central banking institution, which controls the monetary policy of the Indian rupee. The RBI plays an important part in the Development Strategy of the Government of India. It is a member bank of the Asian Clearing Union.

• The general superintendence and direction of the RBI is entrusted with the 21-member Central Board of Directors headed by Governor:

1. the Governor,

2. 4 Deputy Governors,

3. 2 Finance Ministry representatives

4. 10 government-nominated directors,

5. 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi.

RBI – Important Chronological events and acts

1926 Royal Commission on Indian Currency (Hilton Young Commission) recommends the establishment of a central bank to be called the 'Reserve Bank of India'.

1 Jan 1949 Reserve Bank of India nationalised; Sir Benegal Rama Rau assumes office as Governor

Dec 1967 Introduction of Social Controls over banks with a view to securing a better alignment of the banking system to the needs of economic policy.

29 Jan 1969Setting up of the Banking Commission by GOI to report on (i) Banking costs; ( ii) legislations affecting banking; (iii) indigenous banking; (iv) bank procedures; (v) non banking financial intermediaries.

30 Mar 1979 Penalty for non-compliance of CRR & SLR introduced to give the Reserve Bank teeth to implement Monetary Policy measures more effectively.

Apr 1988 Security & Exchange Board of India (SEBI) established to deal with the development and regulation of the securities market and investor protection.

15 Jul 1994 Nationalized Banks allowed to tap the capital market to strengthen their capital base.Jun 2001 RBI issues guidelines for internet banking heralding in a new era in banking.

Growth of banking system in India

The spread of the banking system has been a major factor in promoting financial intermediation in the economy. The magnitude of growth of banking system can be indicated as follows:

.Expansion of Banking Since Nationalization Year 1969 1991 2007 2012

No. of Commercial Banks (incl. RRBs and LABs) 73 272 182 173

No. of Bank Offices 8,262 60,570 74,563 1,01,261

Out of 2, no. of Rural and semi-urban bank offices 5,172 46,550 47,179 62,061

Population per office 64,000 14,000 15,000 13,000

Per capita Deposit of Scheduled Commercial Banks Rs. 88 Rs. 2,368 Rs.23,382 Rs.51,106

Per capita Credit of SCBs Rs. 68 Rs. 1,434 Rs.1,7541 Rs.39,909

Broad canvass of Corporate Governance guidelines for Banks

1. Operate the bank’s business on a day-to-day basis 2. Meet the obligation of accountability to their shareholders and take into

account the interests of other recognized stakeholders;3. Align corporate activities and behaviour with the expectation that banks

will operate in a safe and sound manner, and in compliance with applicable laws and regulations

4. Protect the interests of depositors

Debut of Corporate Governance in Indian banks • With a view to strengthen the internal supervisory role of the Boards in banks in

India, 3 advisory groups were formed. 1. An Advisory Group on Corporate Governance was formed under the

Chairmanship of Dr. R.H. Patil. Following its recommendations in March 2001.2. Another Consultative Group was constituted in November 2001 under the

Chairmanship of Dr. A.S. Ganguly.3. further reinforced by certain observations of the Advisory Group on Banking

Supervision under the chairmanship, Shri M.S. Verma which submitted its report in January 2003.

All the above recommendations and the cross-country experience helped the Reserve Bank of India to strengthen the corporate governance in the Indian banking sector.

Code for Independent directors - Role and functionsThe Code is a guide to professional conduct for independent directors. Adherence to These standards by independent directors and fulfilment of their responsibilities in a Professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

1. Help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct

2. Scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance

3. Bring an objective view in the evaluation of the performance of board and management

4. Balance the conflicting interest of the stakeholders

5. safeguard the interests of all stakeholders, particularly minority shareholders

6. Determine appropriate levels of remuneration of executive directors

Code for Independent directors - Duties1. Seek appropriate clarification or amplification of information and, where

necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company

2. Strive to attend all meetings of the Board of Directors and of the Boar committees

3. Participate constructively and actively in the committees of the Board

4. Report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy

5. Acting within his authority, assist in protecting the legitimate interests of the Company, shareholders and its employees;

SEBI Guidelines on corporate Governance in Banks

The Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance and circulated the recommendations to all stock exchanges for implementation by listed entities as part of the listing agreement vide SEBI’s circular SMDRP/Policy/CIR-10/2000 dated February 21, 2000

As requested by SEBI, it has now been proposed that the SEBI Committee’s guidelines may be taken up for adoption by those commercial banks listed in stock exchanges so that they can harmonize their existing corporate governance requirements with the requirements of SEBI, wherever considered appropriate..

SEBI Guidelines on corporate Governance in Banks1. Optimum combination of executive and non-executive directors in the Board

2. Pecuniary relationship or transactions of the non-executive directors

3. Independent Audit Committees, their constitution, chairmanship, power, roles, responsibilities, conduct of business, etc

4. Remuneration of Directors (in case of private sector banks)

5. Periodicity /number of board meetings

6. Disclosure by management to the board about the conflict of interest

7. Information to shareholders regarding appointment/re-appointment of directors,

8. Display of quarterly results/presentation to analysts on the web- site

9. Maintenance of office by non-executive Chairman.

Impact of Corporate Governance norms & policies in Banks The RBI move to strengthen Corporate Governance led to seminal changes in the bank administration.

They are some of the laud indicators of the sustaining policy of operating sound banking system

The sustained profitability, lower level of non-performing assets, improved return on assets

The corporate governance framework in banks has been strengthened through

regulation, supervision and By maintaining constant interaction with the management

POST REFORM PERIOD: Led to many banks accessing capital market to shore up their capital adequacy ratio, an essential prescription of Basel-I then and Basel –II now.

• Subscription of bank’s equity is a function of public confidence which stems from governance policies

Learning from the Corporate Governance & Road ahead Corporate governance across the globe is omnipotent to create a culture of

sustainable growth. With changing dimensions of corporate governance practices banks need to

transform into much more dynamic and forceful entities setting a broad vision for the future.

The challenge is to groom the management to balance between temptations to flout ethical standards in exchange for short term gains. Hence, the acid test for the Board team is to build a management stream that can strengthen the fence of moral and ethical values.

It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament or that their ownership is in the private or public sector.

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