RBI Notifications

Governance of the commercial banks

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Companies Act 2013

Mains level : Paper 3- Governance issue in the banks

This article discusses the nitty-gritty of the recently released discussion paper by the RBI on governance. Governance in the commercial bank has been in the news following the failures of some banks.

Discussion paper by RBI

  • Recently RBI released a discussion paper on ‘Governance in Commercial Banks in India’.
  • Recently there have been high-profile instances involving governance failures in certain banks.
  • These instances have called into question the adequacy of the existing legal regime for ensuring good governance in commercial banks.
  • Internationally, the question of governance norms in banks is treated differently given the complex nature of functions performed by banks in comparison to other businesses.
  • Functions of the banks make them critical for allocation of resources in the economy, protection of consumer interests and maintenance of financial stability.

Objectives of the discussion paper

  • The stated objective of the discussion paper is to align the current regulatory framework on bank governance with global best practices.
  • Best practices include the guidelines issued by the Basel Committee on Banking Supervision and the Financial Stability Board.

Current regulatory framework

  • To this end, RBI adopts international standards for bank governance into the general corporate governance framework in India.
  • This general governance framework comprises the Companies Act, 2013, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Requirements, 2015.
  • These governance norms focus on the responsibilities of the board of directors, board structure and practices.
  • And it also includes aspects of risk management, internal audit, compliance, whistle-blowing, vigilance, disclosure and transparency.

Issue of connection between management and owner

  • RBI also constituted an internal working group to review the extant regulatory guidelines relating to ownership and control in private sector banks.
  • This group is expected to submit its report by September 30, 2020.
  • But the assumption that deeper connections between the management and the owners necessarily lead to mismanagement needs to evaluated carefully and recalibrated to ensure balanced reforms.
  • The governance risks attributable to such connections might be relevant for government-owned banks as well.

Key recommendations in the paper

  • (1) The majority of a commercial bank’s board must comprise of independent directors.
  • This is a standard higher than that prescribed under the Companies Act and the SEBI Regulations.
  • (2) The chairperson of the board must be an independent director.
  • (3) Chairpersons of crucial board committees (the audit committee, the risk management committee and the nomination and remuneration committee) must be independent directors who are not chairpersons of any other board committee.
  • (4) The tenures of non-promoter CEOs and WTDs should be limited to 15 years.

Way forward

  • In order to make the reform effective, the appointment process for independent directors also needs to be re-evaluated to limit the role of controlling-shareholders.
  • The liability regime for directors on the boards of banking companies should also be revisited to balance the rights and liabilities of the directors.
  • The efficacy of implementation of norms as prescribed will depend on adequate enforcement.
  • The findings of the report of the working group have to be considered to formulate a comprehensive and effective governance framework for commercial banking in India.

Consider the question “Given the complex nature of functions performed by the banks in comparison to other businesses subjecting them to stricter norms of governance is necessary. In light of this examine the adequacy of existing governance norms and suggest ways to improve them.”

Conclusion

RBI must exercise caution to ensure that the reforms balance the interests of all the stakeholders and do not come at the cost of discouraging investments and entrepreneurship in the Indian banking industry.

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