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Messy Play Or Clean Up Act?
The Central bank should be sensible and watchful while bumping radical changes at banks. Forceful governance standards won’t clean up the banking sector.
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Due to many high profile flare-ups entailing dominance or control concerns in banks and financial institutions, corporate governance in the banking sector has encapsulated a great deal of attentiveness latterly in India. Considering the inadequacy and ineptitude of the norms prescribed by the Securities and Exchange Board of India to handle governance in banks and financial establishments, the Reserve Bank of India has published a Discussion Paper on Governance in Commercial Banks in India. According to the RBI the objective of the discussion paper is to bring into line the current governing scaffold with international best practices while being watchful of the framework of the domestic financial system.
The due date for evocations and comments on the discussion paper is July 15. The RBI has mentioned that fresh guidelines will be released based on the feedback of stakeholders. The new norms applicable to private, foreign and public sector banks will come into effect within six months after being sited on the website of Reserve Bank of India or from 1st day of April 2021, whichever is later.
What’s on paper?
The discussion paper sees the light of day in the background of two latest cases of governance failures at ICICI and YES banks. The former CEO of ICICI bank had to step down in the midst of accusations of conflict of interest and for violation of code of conduct. The founder of YES bank has been charge-sheeted by Enforcement Directorate for granting high value loans in slipshod fashion. Therefore, the paper positions advanced accountabilities for the Board of Directors to make sure that the banks preserve uppermost benchmarks of governance and circumvent conflict of interest. The RBI has cited that the Board should outline a penned conflict of interest policy to confirm that directors are aware what actions or events could lead to conflict of interest. It has also mentioned that a director should desist from voting or inducing in any theme or topic where there is a conflict or the director’s independence is affected.
In addition, with an intention of designing crystal clear division of responsibilities between the Board and the management, the paper specifies that a management functionary who is a non-promoter or major shareholder cannot be a whole-time director or chief executive officer of a bank for over 15 consecutive years. From then on, the individual shall be eligible for re-appointment as WTD or CEO only after the conclusion of three years. However, during those three years period the individual shall not be appointed or related with the bank in any capacity. The paper restricts promoters from holding the CEO or WTD position for in excess of 10 years. Once the final guidelines are issued by the Reserve Bank, banks with WTDs or CEO who have completed ten or fifteen years shall have two years or up to the expiration of the current term, whichever is later, to discover and appoint an inheritor.
The other prescribed restrictions are maximum 70 years age limit for CEOs and WTDs, members of the Board should not be a member of any other bank or the RBI. They should not be either members of Parliament or State Legislature or Municipality or other local bodies. The strength of Board of directors of a bank should not be less than six and not more than fifteen. The Board should conduct meetings at least once in sixty days and at least six times a year. Prior approval of the Reserve Bank of India is mandatory for appointment, re-appointment and extermination of whole-time directors and chief executive officers. If the individual is not a proprietor of a Non-Banking Financial Company or a full-time employee and that the NBFC does not enjoy a financial accommodation from the bank, a director on the board of an entity other than a bank may be considered for appointment as director on a bank’s board.
The paper places numerous procedures to guarantee appropriate conduct of various committees of the board - the audit committee, nomination and remuneration committee and the risk management committee. The central bank also counseled substantial prominence on having a robust internal audit mechanism and vigilance scheme. The paper advises appointment of Company Secretary for Banks and parameters relating to performance assessment and roles of the company secretary, Responsibility of the company secretary, Secretarial Audit Applicability and Compensation of the functionaries.
Will reform be effective?
At first glance, the paper is an appreciable endeavor to spruce up Indian banking, particularly after the extremely unpleasant developments at PMC Bank, YES Bank etc. Nonetheless, the accomplishment of the efforts will depend on the extent to which the watchdog efficiently enforces the norms or medians.
The paper concentrates on commercial banks but a deeper look exhibits that only private sector banks and foreign banks will be the scapegoats. Public sector banks are doubtful to be squeezed and NBFCs have been left out of the ambit completely. Furthermore, the paper has no specific statutes or restrictions applicable to the Government of India, who as a promoter holds the capacity to issue orders to such banks. This will definitely create ditch in the governance.
Also, the RBI must know that complete obligation of financial sector guardianship lies with it. It should not try to shift the responsibility to the bank boards. It is open secret that the debacle at ICICI bank, fiasco at Axis bank, farce at IndusInd bank and mess at IL&FS etc. were the outcome of gross negligence of the RBI. Therefore, attempts to pass the responsibility may not help at all.
In conclusion, the Central bank should be sensible and watchful while bumping radical changes at banks. Forceful governance standards won’t clean up the banking sector. Very importantly the RBI should confirm that its controlling organ on banks is strong and its review squads are alert to check scandals before they occur. This can make governance reform be truly effective and help the Central bank to keep its preamble shining.
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.