CORPORATE GOVERNANCE & BUSINESS ETHICS

CORPORATE GOVERNANCE IN
BANKS & RBI
Arun Kumar Singh
Umesh Nayaka

Corporate Governance
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 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.
6.
.
.

Government
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

TheReserve Bank of Indiais India'scentral bankinginstitution, which

controls themonetary policyof theIndian rupee. The RBI plays an
important part in the Development Strategy of theGovernment of India. It
is a member bank of theAsian Clearing Union.

The general superintendence and direction of the RBI is entrusted with

the
21-member Central Board of Directors headed by Governor:

1. theGovernor,
2. 4 Deputy Governors,
3. 2 Finance Ministryrepresentatives
4. 10 government-nominated directors,
5. 4 directors to represent local boards headquartered at Mumbai, Kolkata,

RBI Important Chronological events and acts

1926
1 Jan 1949
Dec 1967
29 Jan 1969
30 Mar 1979
Apr 1988
15 Jul 1994
Jun 2001

Royal Commission on Indian Currency (Hilton Young Commission) recommends

the establishment of a central bank to be called the 'Reserve Bank of India'.
Reserve Bank of India nationalised; Sir Benegal Rama Rau assumes office as
Governor
Introduction of Social Controls over banks with a view to securing a better
alignment of the banking system to the needs of economic policy.
Setting 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.
Penalty for non-compliance of CRR & SLR introduced to give the Reserve Bank
teeth to implement Monetary Policy measures more effectively.
Security & Exchange Board of India (SEBI) established to deal with the
development and regulation of the securities market and investor protection.
Nationalized Banks allowed to tap the capital market to strengthen their
capital
base.
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
No. of Commercial Banks (incl. RRBs
.and LABs)
No. of Bank Offices
Out of 2, no. of Rural and semi-urban
bank offices
Population per office
Per capita Deposit of Scheduled
Commercial Banks
Per capita Credit of SCBs

1969

1991

2007

2012

73

272

182

173

8,262

60,570

74,563

1,01,26
1

5,172

46,550

47,179

62,061

64,000 14,000 15,000 13,000

Rs.
Rs.23,3 Rs.51,1
Rs. 88
2,368
82
06
Rs.
Rs.1,75 Rs.39,9
Rs. 68
1,434
41
09

Broad canvass of Corporate Governance guidelines fo

1. Operate the banks 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

Code for Independent directors - Role and functions

The 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 Boards
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

1.

Code for Independent directors Seek

appropriate clarification or amplification of
Duties

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 companys code of
conduct or ethics policy

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 SEBIs circular SMDRP/Policy/CIR-10/2000
dated February 21, 2000
As requested by SEBI, it has now been proposed that the
SEBI Committees 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

SEBI Guidelines on corporate Governance in Banks

1.Optimum combination
directors in the Board

of

executive

and

non-executive

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

Impact of Corporate Governance norms & policies in

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 banks equity is a function of public confidence which stems

Learning from the Corporate Governance & Road ahe

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

THANK YOU