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Mess in the making or clean-up act?

By Shivanand Pandit

Corporate governance in the banking sector is in the limelight because of several high profile flareups in commercial and cooperative banks. 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 (RBI) published a Discussion Paper on Governance in Commercial Banks in India.

According to the RBI the objective of the discussion paper is to bring in line the current governing scaffold with international best practices while being watchful of the framework of the domestic financial system.

The due date for feedback 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 posted on the website of RBI or from April 1 2021, whichever is later.

What’s on paper?

The discussion paper is against the background of two latest cases of governance failures at ICICI Bank and YES Bank. 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 asks for greater accountability of the Board of Directors.

The RBI has said that, the board members should formulate a conflict of interest policy to confirm that directors are aware what actions or events could lead to conflict of interest. It is also mentioned that a director should desist from voting or inducing any topic where there is a conflict of interest or the director’s independence is affected.

In addition to the goal of making 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 director 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 director position in excess of 10 years.

Once the final guidelines are issued by the RBI banks with whole time directors or CEO’s who have completed ten or fifteen years shall have two years or up to the expiration of the current term, whichever is later, to appoint an inheritor.

The other prescribed restrictions are maximum 70 years age limit for CEOs and whole time director. The discussion paper suggests that members of the board should not be a member of any other bank or the RBI. They should also not be  a member of the parliament, state legislature, 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 RBI is mandatory for appointment, re-appointment and removal of whole-time directors and CEOs. If the individual is not a proprietor of a NBFC 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, viz. the audit committee, nomination and remuneration committee and the risk management committee. The apex banks also asks for more weight on robust internal audit mechanism and vigilance scheme. The paper advises appointment of a 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 needs to be appreciated for its attempt to cleanup Indian banking, particularly after the extremely unpleasant developments at PMC Bank, YES Bank, etc. However success depends on the extent to which RBI efficiently enforces the norms or medians.

The paper is aimed at improving governance for all commercial banks but a deeper look reveals that, only private sector banks and foreign banks will be the scapegoats. It is doubtful whether governance in public sector banks will be subject to deep scrutiny. Furthermore the paper has no specific guidelines for the government who is the promoter of PSU banks. This will definitely create a hitch 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 RBI needs to be pragmatic while imposing radical changes at banks. Forceful governance standards won’t clean up the banking sector. Very importantly the RBI should convey its control on banks and its review squads are alert to check scandals before they occur. This can make governance reform in banks truly effective.

Highlights of the Discussion Paper

Board members should not be a member of the board of any other bank or the Reserve Bank of India.

Board members should not be either a member of parliament or state legislature or municipality or other local bodies.

The strength of the board should not be less than six and not more than fifteen, with a majority being independent directors.

Board meetings must at least be once in 60 days and at least six times a year.

If the individual is not a proprietor of a NBFC 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, the individual may be considered for appointment as director on a bank’s board.

Prior approval of the RBI is mandatory for appointment, re-appointment and extermination of whole-time directors and CEO.

The higher age limit for CEO and whole-time directors of banks is recommended at 70 years. Banks will be free to fix a lesser age for such appointments.

The paper restricts promoters from holding the CEO or whole time director position for excess of 10 years and the term of a non-promoter CEO or WTD will be plugged at 15 years.

The writer is a tax specialist, financial adviser, guest faculty and public-speaker based in Goa. He can be reached at panditgoa@gmail.com

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