THOUGHTS ON GOVERNANCE INDIAN BANKING SYSTEM

[Dr. Sanjiv Agarwal]

The importance of corporate governance in banks can not be undermined and is paramount in larger interests of shareholders, depositors and economy as a whole. Indian banking is today at cross roads facing challenges such as mounting non-performing advances (NPAs) failure of risk management triggers, ethical vacuum at top management and lack of governance, performance and transparency in the system. There may be different yardsticks for governance in PSBs and private banks.

Responsibilities of the Board of Directors

ICSI has issued Secretarial Standard (SS-1) dealing with Board procedures in relation to board meetings. The same may be made mandatory for  all banks, whether incorporated or not.

Board approved Code of Conduct shall be made applicable to board members and one level below and for management / employees. Its implementation to be monitored by CVO for employees and by Nomination & Remuneration Committee (NRC) for top management / board members.

Board responsibilities may be documented after board approval in form of a document. This should also form part of mandatory director’s induction programme which may be imparted within two months of appointment. Each bank should have a board charter and it may be made a part thereof.

Duties of directors of banks may also be aligned to section 166 of the Companies Act, 2013 for uniformity and consistency. Where any board member is required to be mandatorily present in Annual General meeting of the bank, he shall be duty bound to attend.

Board structure and practices

Regular assessment may be done either by the board as a whole or by a committee of board, preferably NRC. Board should have a policy document for the same and it may be desirable to have a due diligence done on an annual basis.

Bank boards are required to have committees as mandated by RBI, Companies Act, 2013 and SEBI (LODR) Regulations, 2015. It is suggested that bank board may also constitute following committee(s), besides any other functional committees :

• Governance & compliance committee
• NPA management committee (separate from credit / credit monitoring function)
• Ethics committee
• Information technology / cyber security committee

Bank boards should be professional to commend trust and respect. Board should develop skills to read early signals.  Minutes should mention the names of directors participating in discussions.

Risk Management Committee

Chief Risk Officer (CRO) shall work on independent basis and report to Risk Management Committee. Internal assurance functions / control functions should shift to risk focused approach in a practical manner, not just on papers. RAS has to be robust, realistic and flexible. Board to ensure coordination between CFO, CRO and CCO. All three must be present in RMC meetings of the Board.

RMCB shall submit a half-yearly report to board specifying risk profile, shift in risks, risk concerns etc. RMCB shall include a director if any, preferably from banking background.

Audit Committee

Under Companies Act, 2013, Company Secretary is the secretary of the ACB also. He is generally also designated as Compliance Officer. Secretary to ACB may preferably be Company Secretary only. CFO, CVO and CCO may be made permanent invitees to ACB. Others may be invited on ‘need’ basis.

ACB shall also cover in its role, appointment, reappointment, remount, remuneration, qualifications etc for all types of audit, e.g., stock audit, credit audit, ISA audit, legal audit, concurrent audit, forensic audit etc. Audit findings including RBI inspections should be allowed to be discussed openly. It is generally seen that ACB meeting with auditors is merely a formality as they have a separate meeting with top management and outcome/ discussions there at are not known to ACB. This needs to be appropriately addressed.

Timelines for supply of information (including periodic results) to the ACB ought to be specified. ACB agenda is heavy besides there being huge calendar items. Number of minimum ACB meetings could be atleast 10 in a year.

One ACB member may be part of RMCB and Serious Fraud Committee  also.

Nomination & Remuneration Committee

NRC shall have a say in allocation of directors on the committees depending upon their skill sets, qualifications and experience.  NRC shall ensure induction programme for new directors and training of directors atleast once in a year.

Performance evaluation of EDs, NEDs and senior management should be done in a structured manner. Directors nominated by Government / MOF may also be subjected to proper due diligence in ordinary course prior to their nomination.

RBI may have an independent oversight on fit and proper criteria which may also include past performance evaluation of the concerned person. Role of RBI nominee directors to be revisited in new governance structure and define accountability in board decisions.

In PSB’s, Government control in appointments need to be rationalized.

Stakeholders Relationship Committee

SRC should review the significant movement in share holding pattern. Management’s communication shareholders / financial analysts should also be put up for review and to ascertain any concerns. Listing / delisting discussions may be perused by SRC.

Senior Management

Senior management ought to be made fully accountable for performance and non-compliances . They have to take ownership of deliverables and consequences of non-performance. Staff accountability issues also need to be addressed appropriately, timely and in just and proper manner.

Compensation

RBI may issue guidelines for consistent and structured remuneration payable to NEDs and independent directors. This may then be subject to board policy and internal guidelines to follow. Board compensation of WTD’s may be made performance linked

Board shall also undertake to have a directors insurance policy for all board members against legal risks. Compensation of CEO to be aligned with risk management and strategy so that CEO may focuses on long term sustainable growth.

Compliance

Compliance function should be an independent and full fledged function under the charge of CRO or CFO. Bank shall ensure a robust, practical and implementable board approved compliance policy which needs to be adhered to and due diligence conducted annually. Compliance and governance committee in banks is a must and is suggested.  CCO should be qualified and an independent person. A compliance certificate should be presented to board on quarterly basis with reasons for non-compliances, if any.

Secretary to the Board

Every bank should have a company secretary in key position in bank Secretariat. The company secretary should not act as secretary to any Committee(s) other than board or ACB. He shall coordinate with various departments in bank for board related agenda / inputs. He shall assist all directors in discharge of their duties. Functionally, he has to report to board chairman / ACB.

The key to good governance lies in effective implementation and strict monitoring, coupled with high standards of ethics, values and transparent practices.