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BW Businessworld

Governance Redux ?

Any such fluidity of regulations detracts from the RBI’s avowed principle of vesting bank boards with more responsibility and initiative. Especially when it needs to demonstrate more of it now.

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The Reserve Bank of India (RBI) had recently issued a fresh set of operating guidelines relating to corporate governance norms in commercial banks. These relate to only private banks, subsidiaries of foreign banks and to the UCBs. For these banking entities, the new guidelines will impact only certain limited operations – board meetings, board committee composition, age limits for wholetime directors (WTD) and independent directors (IDs) – with the central bank promising to issue a more comprehensive master direction on governance soon.

In July 2020, the RBI had sought stakeholder feedback on its discussion paper on governance in commercial banks.

Draft discussion papers & public inputs

Using the same principles of transparency for public consumption, for every discussion paper put in public domain for feedback, RBI might well publish:

  • the number of feedback received, 
  • types of inputs and observations received, and 
  • also indicating number of such feedback received from categories like “RBI regulated entity”, “industry association”, “civil society”, “elected political representative”, “non-elected political person”, “general public”, “other country governments”, “others”.  

This type of granular-disclosure would indicate how seriously the draft discussions were received in the public domain and the quality of debate that goes into reshaping it from its original draft form. Such disclosure would not impinge on the authority of the RBI or compromise on national security.

New guidelines 

Public comments received in due course have ostensibly given rise to these new guidelines. However, these work-in-progress guidelines could end up creating more regulatory discord with its expectation of high governance standards.

The first source of discrepancy lies in the interim nature of these rules. This haste for issuing an interim set of guidelines, which by their very nature are limited, is inexplicable and could generate partial acquiescence. Bank boards are likely to wait for the final master directions before designing and implementing governance codes. Over the years, the banking sector leaders have learnt to be alert to the likelihood of a gap between interim and final guidelines, and might prefer to wait for the master direction, rather than risking implementing something and then having to overhaul it.

One rule for all

But the glaring lacuna is the continuation of differential governance architecture in the regulatory framework. The circular issued by RBI on April 26, 2021, states: “In respect of State Bank of India and Nationalised Banks, these guidelines would apply to the extent the stipulations are not inconsistent with provisions of specific statutes applicable to these banks or instructions issued under the statutes."

Consequently, this new guideline will continue to exclude the public sector banks, which constitute the bulk of the Indian banking industry. Seen through another lens, the guidelines will not apply to almost 60% of the banking industry’s assets under management, thereby rendering the guidelines still-born.

The independence of the banking regulatory authority should ideally allow for this anomaly to be corrected, hopefully when the final set of guidelines are announced. This would subsume all necessary discussions and agreements - with the bureaucracy as well as the polity. Some of these statutes will need Parliament’s approval.  

“Fit & Proper” blackbox

Specifically, two sets of norms will apply for selection of independent directors (IDs) in commercial banks. 

In private banks, boards have to submit to RBI their recommendations for appointment of IDs, which then are put through an amorphous “fit-and-proper criteria” process; which in turn creates a question mark about the perceived whimsical nature of the regulator’s approval process. 

In public sector banks, the government appoints IDs with RBI providing pro-forma approval. In fact, much research and media-reporting have documented how these appointments are usually reserved for those “networked” or “in favour”. 

The Banks Board Bureau was set up in 2015 for improving the selection process of IDs and whole-time directors (WTDs) but has not made much impact in the political economy of state-sponsored banking.

The problem applies to even whole-time directors (WTDs) in public sector banks, where the chief executive or managing director is usually selected by the government, with the bank’s board and RBI mostly rubber-stamping the process. State-owned banks have often been in the news for chronic vacancies for the post of executive directors, or occasionally even for the post of non-executive chairman. In March 2021, six months after the Banks Board Bureau had sent its recommendations in September 2020, the government finally approved the appointment of 14 executive directors in 10 public sector banks. 

In the three-cornered appointment activity between the Bureau, the government and the bank concerned, there seems to be no space for RBI’s governance yardstick.

Ideas for RBI

Why can’t the RBI regulatorily mandate the NRCs of Bank boards to compulsorily shortlist the successor to a bank chief at least 6 months in advance?

And, in keeping with best practices adopted by global corporates, let the bank boards be tasked with an annual “sealed envelope” exercise to update RBI with a “drop-dead successor” to the current CEO.

Regulatory asymmetry 

The interim guidelines have been birthed with another genetic flaw: wiggle room for regulatory arbitrage. 

The tenure of the managing director and chief executive, or a WTD, who is also a promoter/major shareholder, has been limited to 12 years, compared with 15 for other chief executives or WTDs. However, the tenure can be extended to 15 years, “at the sole discretion of the Reserve Bank”.

This affords the central bank adequate regulatory latitude, where rules are open to interpretation and arbitrary decisions cannot be subjected to the litmus test of a rules-based governance framework, and consequently in a Court of Law.

In the one specific factor that RBI catalogues -- the dilution of promoter shareholding over time will be a factor in considering the tenure extension from 12 to 15 years – there are no unambiguous milestones, leaving RBI free again to interpret what is the right “level of progress”. This arbitrariness should not be cause for any accusation of partiality towards any specific bank promoter-CEO in the next few years. 

Any such fluidity of regulations detracts from the RBI’s avowed principle of vesting bank boards with more responsibility and initiative. Especially when it needs to demonstrate more of it now.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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rbi policy reserve bank of india

Rajrishi Singhal

The author is a Policy consultant and journalist

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Srinath Sridharan

Independent markets commentator. Media columnist. Board member. Corporate & Startup Advisor / Mentor. CEO coach. Strategic counsel for 25 years, with leading corporates across diverse sectors including automobile, e-commerce, advertising, consumer and financial services. Works with leaders in enabling transformation of organisations which have complexities of rapid-scale-up, talent-culture conflict, generational-change of promoters / key leadership, M&A cultural issues, issues of business scale & size. Understands & ideates on intersection of BFSI, digital, ‘contextual-finance’, consumer, mobility, GEMZ (Gig Economy, Millennials, gen Z), ESG. Well-versed with contours of governance, board-level strategic expectations, regulations & nuances across BFSI & associated stakeholder value-chain, challenges of organisational redesign and related business, culture & communication imperatives.

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