Governance of Bank Boards in India

Posted in Finance Articles, Total Reads: 446 , Published on 30 June 2016
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Banks are vital institutions in a society and they significantly contribute to the development of an economy through facilitation of business operations. They facilitate development of saving plans and are instruments of the government’s monetary strategy among others. They act as a stethoscope to analyse the economy of country. Considering the huge importance of this sector and in specific the role played by Public Sector banks (PSB) in nation building the, Reserve Bank of India (RBI) had set up a “Committee to Review Governance of Boards of Banks in India” under the chairmanship of Mr.P.J.Nayak (Former Chairman and CEO, Axis Bank, and Former Country Head, Morgan Stanley India, Mumbai).

Background

PSB act as an important means for credit enhancing and financial inclusion. PSB were created as an instrument for financing strategically important sectors in which the private sector will be unwilling to invest. They account for about 70% of assets in the banking system. Recently due to global slowdown and sluggish growth of the Indian Economy the PSB are facing menace of Non-Performing Asset. This has brought to light the governance structure of the PSB and their functioning. They are subjected to colossal government interference which makes them fearful of making a commercially viable decision. Some of their decisions may not be commercially and professional aimed towards profit maximization. They also face multiple regulating bodies such as RBI, Finance Ministry, CBI and Central Vigilance Commission. Also the remuneration packages of PSB chiefs are very less as compared to their private banks counterparts. It is in this context that the RBI had set up this committee. Recently the committee submitted its report which revolves around the bank boards.


Image: Wikimedia


Recommendations

The committee found that the bank board selection process is highly compromised upon thus leading to weak governance. It also holds reservations about the ability of boards to steer the economy from the present difficulties faced by PBS.


The report holds the view that the central government should shed the duty of bank governance and should repeal Bank Nationalization Act together with the State Bank of India Act. All banks should be incorporated in Companies Act. After incorporating all the banks, a Bank Investment Company (BIC) should be constituted to which all shareholdings of government will be transferred. BIC should be assured of its autonomy from government interference. CEO of BIC should be a professional banker and should be appointed by search process. Along with this, all the directors should preferable be independent and well experiences in investments.


RBI should be the sole regulator of all banks and the government should not give any regulatory instructions which are applicable to public sector banks only as it amounts to discrimination. This will also bring uniformity in all banks and bring them at par.


As for the process of appointments to bank boards, in the long run the BIC should be doing this and in future should transfer most of its powers to bank boards. The minimum tenure of chairman should be five years minimum. Also younger people with successful track record should be groomed foe senior management roles in future.


The report contemplates that the government holdings in banks should fall below 50 per cent. In that scenario though government will be dominant shareholder, a competitive environment would be created along with increase in professional decision making. With government shareholding below 50 per cent the banks will be free from external regulations of CVC, Right to Information Act and from government constraints on employee compensation.


A partner or employee of auditor or firm should not be director in another bank because she has access to client information and can hamper sound decision making. Also the independence of auditors and directors should be maintained.


In and out, the report calls for revamping the bank boards and indirect privatization through dilution of shareholding by governments. This call of privatization has been a subject matter of lot of debate.


Upshot of report

It should be taken in consideration that though acceptable from profit making point of view, today we are in a welfare state, where development is more important than growth. If the recommendations are implemented for solely commercial consideration, the government won’t be able to fulfil its development objective and Inclusive Development. Also the profit maximization skills of the private sector will be huge impediment for the inclusive growth agenda of government.


The regulation and vigilance exercised on PSB though CVC and RTI act should be taken positively and should be seen as instruments in accountability. Given the quantum of public money PSB holds, accountability is second to nothing. Also global evidence proves that private bank boards are no better and some of the biggest financial crises have been triggered by their dysfunctional behaviour.

The idea of forming BIC is itself fragile as it will give a bunch of board members a significant control over PSB thus putting whole lot of PSB’s in jeopardy in case of their inability.


Considering the radical suggestions made by the report and its long term impact, there is no doubt that the report will need a lot of political will to implement. The employees’ unions are much against this move of indirect privatization. It would be prudent move on part of government to analyse the long term implication of these recommendations and move forward with caution. The impact, positive or negative, is going to be huge."


This article has been authored by Swaraj Chhallani from The Institute of Chartered Accountants of India


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