Governance in Banks Back on the Drawing Board of RBI
A strong financial sector is the foundation on which India’s emergence as a global player would rest. In due recognition of that, the very comprehensive "Discussion Paper on Governance in Banks" comes from the Reserve Bank of India (RBI) is a formidable effort to set the house in order and bring about the much-needed reforms in banks. Large balance sheets do not add much strength, nor report on good governance, as a reflect on just a one-day-in-a-year picture.
There and is a broad realisation that a change in the mindset among bankers would come about neither by the diktats of the RBI nor by those of the bank’s owner, but rather, by internalising the best governance factors. Despite the excess liquidity pumped into the banks during the last six months, credit to the needy does not flow. Risk aversion needs reversal and this can happen with good, responsible and accountable governance.
 
Increasing bank frauds, cybercrimes, arrest of some top executives and chairpersons of reputed banks like the ICICI, failures of PMC Bank, Times Bank, Yes Bank and several others in hiding, have obviously triggered the RBI into getting to the drawing board on governance. The paper has heavy referencing to the Basel Committee on Banking Supervision (BCBS), the Organisation for Economic Co-operation and Development OECD and the Ashok Ganguly Report, bringing back to the drawing board of the RBI its seriousness in action and not just intention. 
 
Contextually, it is heartening to see that what I have been articulating since 1999: Corporate Governance in Banking & Finance (Tata-McGraw Hill, 2000 with YRK Reddy) and ‘A Saint in the Board Room’ (Konark Publishers: 2011) with R Durgadoss, finds an echo in the paper. Two decades of wait has been worth it.
 
The government, going by the experience so far, considers that institutions created under its fold are holy cows and should, therefore, be protected at the cost of the exchequer. Hopefully, the GoI (Government of India) would embrace these governance reforms in public sector banks (PSBs) and hasten corrections with a sense of urgency.
 
There is enough proof in India that regulation and bank supervision are interdependent and not of independent of governance in banks. Both have limitations with effective interplay among them. Viewed from this angle, the Discussion now specifies the key stakeholders’ role, distinguishes the role of the non-executive director from those of the independent director and the workmanship director.  
 
A foundation is built for the whole house; there are not separate silos for the kitchen and the bedrooms. In the same way, audit, compliance and risk management should maintain their necessary independence — but not operate in three different silos. Governance is the binding force/material and it rests on the board. It helps all the three groups speak the same language and connect with business processes and products. 
 
The Discussion Paper concentrates on the audit and risk processes as more proactive than reactive until now. Once the house is built, no one would like to go to the foundation to make changes. Therefore, change management is extremely crucial. Board cannot be expected to do the change management function. Change management requires federated ownership, to cite a Governance, Risk Management and Compliance Management (GRC) framework study.
 
Two aspects are needed in order to trigger the actions mentioned in the discussion Paper , although experts in various fields are taken on bank boards. Knowledge cannot be taken as something given and permanent and it requires frequent updation.
 
1. Directors should themselves be prepared for new responsibilities and new roles. In the first meeting of the board, the first item on the agenda should be the series of actions ordained in the Discussion Paper and their understanding in the present and emerging context. Each director may be asked to furnish upfront what he or she would like to contribute to the board and the objectives of the bank. This would be the board’s review point half-yearly and annually. Qualitative change will become possible through this measure.
 
2. Half-yearly retreats for self-renewal of the board directors away from the traditional board meetings has the potential for a free and open discussion on the issues - both internal and external - to the organization. It is not a common practice to have a separate budget for board management. It is good to have a board approved budget for its own functioning and knowledge upgradation. Usually good directors will be on the learning curve and hence, wisdom lies in taking advantage of it. ‘Fresh thinking’ that the RBI advocated would be possible with such a measure.
 
Even mega banks, measured by their balance sheets, suffer from issues that they would prefer to hide, and therein lies the danger. One of the leading large PSBs in its latest balance sheet has very low net interest earnings – not just due to low credit outflow but more due to gains in the reduction in the interest rate on deposits, for nine-times in a year! Depositors are minority stakeholders. The bank earned profit from sale of its stake in a subsidiary and not due to its core banking business where credit sale is poor and deposits rose despite and not because of its efforts. 
 
RBI cannot be a gatekeeper of the banks. It can only direct the banks to take care of the interests with due concern for the economy and various other constituents. It is here that the whistle blower policy implementation becomes crucial. We have seen lackadaisical responses even to RTI (Right to Information) questions and resorting to the courts for seeking responses. Such an approach will work in the absence of transparency persons in responsibility are not held accountable.
 
The Paper has fully accommodated the recent statement of the FM that the banks need not be afraid of the three ‘C’s – the Central Vigilance Commission (CVC), the Central Bureau of Investigation (CBI) and the Comptroller and Auditor General (CAG) as such references would be made only after fully exhausting internal examination and action. 
 
While minority shareholders’ interest may be taken care of, depositors turning a minority stakeholder, would harm the interests of banks in the long run. The correction can come from governance and the RBI’s latest approach makes adequate mention of it in its paper. 
 
It is also interesting to find that the RBI as regulator would divest its participatory role in the board. One hopes the government of India would not raise any objection on this issue. It has been noticed thus far that the value the RBI director imparted in the board disclosures has not been significant. 
 
There is a thin line between the non-executive directors and independent directors and this subtlety has been well addressed in specifying their roles in the NRC committee and audit committee. Risk management committee chair to be directly responsible to the chairman is worthy of note. It has rightly identified risk appetite framework as crucial for the eventual risk measurement and management. Those who cannot risk prudently cannot get rewarded. It could have specified that non-performers, because of their clean slate, cannot be elevated to key management positions in the organisation and the Board would ensure this through its effective oversight. 
 
While it has kept its banner line on culture and values, it could have also constituted an ethics committee with an outside expert nominee of the RBI to chair it and make it responsible to the chairman directly. Business ethics is an oxymoron and therefore, defining it is crucial in financial institutions. Measuring ethics has been templated by the writer in the book A Saint in the Board Room. Corporate executives can be subjected to this test while the board directors are supposed to be ethical, having the right values to uphold the organisational culture. The future tells it all. 
 
(The author is an economist and risk management specialist. The views expressed are personal.)
 
Comments
yerramr
1 year ago
If everybody is a dishonest loanee, then the NPAs should be 100%. If every banker is honest in assessment and sells only loan products in time and to the requirement of the borrower without undue harassment and delay, repayments and not recoveries would come in. I am a hard core banker for 3 decades and I say this from experience . Most small borrowers whether farmers or MSMEs cannot afford the luxury of evading or avoiding the loan for he keeps needing debt to run his enterprise.
Second, If one thinks that in a country like India, Rs.35lakhs is a poor pay just because a Bank like HDFC gets a few crores per annum, and with lots of perks for both, there must be a system to cut the salary of HDFC likes in the country. Remember, the huge salaries come out of the earnings of the Banks and not fall from heaven.
rajoluramam
1 year ago
Why our bank's loan portfolio is failing? What are the reasons? The first and fundamental reason is
" we lack basic honesty". Every body who takes loan from a pulic sector bank, tries to evade repayment, whether he is a small or big borrower. Small borrower thinks that, if it is a Government bank one need not repay and it will be subsequently waived. Big borrowers boost the loan requirement by 30 to 40% so that it covers his margin. Due to this, his personal stake in
estblishing the industry. They try to squeeze as much as possible from the bank by appointing his own kith and kin on high salaries. The bankers are poorly paid and lured by small favours. SBI charman gets 38 lakhs monthly salary as against Rs 55 crores salary by HDFC boss!
rajoluramam
Replied to rajoluramam comment 1 year ago
Sorry! Itis yearly salary by SBI
Chairman not monthly.
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