After Shaktikanta Das, governor of Reserve Bank of India (RBI), expressed his concern that at the core of financial stability lies good governance of banks, deputy governors Rajeshwar Rao and MK Jain spoke on the subject in great detail in different forums. A draft report on governance in banks was put on RBI's website in June 2020. The pandemic that followed should have put on the back foot either affirmative action or the follow-up on the draft report. This brief article would like to recall some earlier efforts and the best that can be done to convert concerns to bold action on governance in banks.
A few of the recent happenings across the globe should have triggered fresh thoughts on governance in banks in India. 1) The failure of Silicon Valley Bank and two more small banks in succession in the US; 2) The after-effects of the pandemic resulted in serious supply-chain disruptions; 3) The impending oil crisis; 4) Decreasing the carbon footprint in the production of goods and services across sectors and nations; and 5) The declining ethics in the corporate sector.
After the Cadbury code on corporate governance in the 1990s, banking companies in India were put on alert in regard to the governance of bank boards. Even earlier, Sections 10-a and 10-b of the Banking Regulation Act, 1949 mandated that the bank boards have persons with professional experience or expertise in specific fields the economy focuses on. RBI has been empowered to identify whole-time directors and part-time chairmen and remove or reconstitute the bank boards. It is a different matter that complying with this mandate had its own journey.
RH Patil (2001), AS Ganguly (2002) and PJ Nayak (2014) gave very valid recommendations on the broad agenda of governance, qualifications and selection criteria for professional and independent directors, and appointment of permanent and part-time chairpersons of the banks and the boundaries of regulation and supervision vis-à-vis governance of bank boards.
Notwithstanding these mandates and recommendations, the country witnessed increasing bank frauds, cybercrimes, arrest of some top executives and chairpersons of reputed banks like the ICICI Bank, failures of PMC Bank, Times Bank, Yes Bank and several others in hiding.
Governance of the future bank boards has much more agenda than what is routinely considered – a regulatory and supervision function of the central bank. As rightly alluded to by the Nayak committee, business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources constitute important functions of the board.
The board agenda has been crowded since the pandemic, and many more issues acquired urgency and seriousness: resource deployment for strengthening financial integrity, monitoring the decline in carbon emissions, and increasing the carbon credits, more intense action with civil society and social media, and arresting cybercrime that has been assuming alarming proportions with the banks adopting superior technologies both in customer interface and credit deployment.
The chapter on the high-level panel on international financial accountability, transparency and integrity for achieving the 2030 agenda (UN FACTI panel, 2021) emphasises fostering a system of 'financial integrity for sustainable development'. The report laid out that “Illicit financial flows (IFFs) — from tax abuse, cross-border corruption, and transnational financial crime — drain resources from sustainable development. They worsen inequalities, fuel instability, undermine governance, and damage public trust.”
The report says: “The world needs to envision a system of financial integrity for sustainable development. Achieving this vision would require concrete actions to ensure that all economic and financial activities conform to rules and standards that are compatible with and contribute to sustainable development.”
It calls for strengthening capacity building to implement the agenda and respond to new risks and context-specific challenges. Governance should help redesign the institutions to adhere to the values of accountability, legitimacy, transparency, and fairness. Enablers should be held accountable to agreed standards.
It is a matter of introspection for both RBI and banks, the extent to which sustainable development is engaging the attention of bank boards.
There is enough proof in India that regulation and bank supervision are interdependent and not independent of governance in banks. Both have limitations with the effective interplay among them. Viewed from this angle, the 2020 RBI discussion paper specifies the key stakeholders’ roles, and distinguishes the role of the non-executive director from those of the independent director and the workmanship director. Worker directors’ posts are vacant for the past two years, indicating that they would be entities of the past.
While it is good to maintain the independence of audit, compliance, and risk management functions, they are highly interactive and cannot operate in different silos. The board acts as the binding force enabling all three groups to be on the same line to seamlessly connect the business processes and products.
Mr Rao, in his address, highlighted five basic principles that should attract the attention of the board: 1. Transparency in financial performance; 2. Risk management practices, reflecting bank’s risk appetite, risk exposures, and risk mitigation strategies; 3. Objective review of management performance and accountability for their actions; 4. Nomination and remunerations committees consider compensation commensurate with the long-term materialisation of risks; and 5. A policy framework for its own assessment for effectiveness, in accordance with their strategies and risk profiles.
While the board cannot perform a change management function that is imperative in the emerging context, it has to trigger the same. The board’s interface with management for this purpose could be through periodical retreats and the participation of independent directors in the capacity-building efforts.
By virtue of one being on the board as director, he/ she is not omniscient or omnipotent and should be still on the learning curve. From the governance point of view, it is important that this person provides a 250-300-word statement on his proposed contribution to the board during the year so that this would serve as a benchmark for self-assessment at the end of the year and the board is enabled to review its own contribution to the growth of the bank through the self-assessment reports of the directors.
(The views expressed are his own. The author is an economist, a senior banker and risk management specialist. He is also the co-author of Corporate Governance in Banks and FIs (Tata McGrawHill, 2000) and A Saint in the Board Room (Konark Publishers, 2011).)
