Banking on Reforms

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The central bank’s attempt to spruce up the banking sector will depend on how far it can enforce its norms. It should also make sure not to make private sector and foreign banks the scapegoats.

By Shivanand Pandit

Due to many high-profile flare-ups entailing dominance or control concerns in banks and financial institutions, corporate governance in this sector has got a great deal of attention 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 RBI has published a discussion paper on “Governance in Commercial Banks” in India. According to the RBI, its objective is to bring in line current governing procedures with the best international practices while being watchful of the framework of the domestic financial system.

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 RBI website or from April 1, 2021, whichever is later.

The discussion paper should be seen against the background of two cases of governance failure 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 the code of conduct. The founder of YES Bank has been charge-sheeted by the Enforcement Directorate for granting high value loans in a slipshod fashion. Therefore, the paper suggests advanced accountabilities for the board of directors to make sure that the banks preserve the benchmarks of governance and circumvent conflict of interest.

The RBI has cited that the board should outline a conflict of interest policy to confirm that directors are aware about what actions or events could lead to a conflict of interest. It has also mentioned that a director should desist from voting where there is a conflict or the director’s independence is affected.

In addition, with the intention of designing a 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 (WTD) or CEO 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, 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 in excess of 10 years. Once the final guidelines are issued by the RBI, banks with WTDs or CEOs who have completed ten or 15 years shall have two years or up to the expiration of the current term, whichever is later, to discover and appoint an inheritor.

Other prescribed restrictions are: maximum 70 years age limit for CEOs and WTDs and members of the board should not be members of any other bank or the RBI. They should not be either Members of Parliament, state legislatures, municipalities or other local bodies. The strength of the board of directors of a bank should not be less than six and not more than 15. The board should conduct meetings at least once in 60 days and at least six times a year. Prior approval of the RBI is mandatory for appointment, re-appointment and termination of WTDs and CEOs. If the individual is not a proprietor of a non-banking financial company (NBFC) or a full-time employee and 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.

The paper suggests 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 stressed having a robust internal audit mechanism and vigilance scheme. The paper advised the appointment of a company secretary for banks and parameters relating to performance assessment and roles and responsibilities of the company secretary, secretarial audit applicability and compensation of the functionaries.

Will these reforms be effective? At first glance, the paper is an appreciable endeavour 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 unlikely 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 a glitch 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 an open secret that the debacle at ICICI Bank, fiasco at Axis Bank, farce at IndusInd bank and the mess at IL&FS 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 seeking radical changes at banks. Forceful governance standards won’t clean up the banking sector. More 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 truly effective and help the RBI to keep its preamble shining.

—The writer is a tax specialist and financial adviser

The post Banking on Reforms appeared first on India Legal.

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