Wednesday, June 17, 2020

Governance back on RBI Drawing Board

Governance in Banks back on the Drawing Board of RBI




India’s emergence as a global player is imminent and so would be a strong financial sector. RBI’s very comprehensive Discussion Paper on Governance in Banks comes as a formidable effort to set the house in order and bring about the much needed reforms in Banks. Large Balance Sheets do not add so much strength as it is just a reflection of one day in a year not so much as good governance.
There is a broad realization that change in the mindset among bankers would not come about by either the dictates of the RBI or its owner but internalizing the best governance factors. In evidence is the excess liquidity pumped into the Banks during the last six months and yet credit to the needy does not flow. Risk aversion needs reversal and this can happen with good, responsible and accountable governance.

Increasing Bank frauds, cyber crimes, arrest of some top executives and Chairpersons of reputed Banks like the ICICI, failures of PMC Bank, Times Bank, Yes Bank and several in hiding have obviously triggered the RBI getting to the drawing Board on Governance. The Paper has heavy referencing to the BCBS, OECD and Ashok Ganguly Report, bringing back to the drawing board of 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 echo in the Paper. Two decades of wait is worth it.

The Government, going by the experience so far, considers that institutions created under its fold are sacred cows and should therefore be protected at the cost of the exchequer. Hopefully, the GoI would embrace these governance reforms in 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. Viewing from this angle, the discussion now unfolded specifies the key stakeholders’ role; distinguishes the role of non-executive director from independent director and workmanship Director.  
A foundation is built for the whole house; there are not separate silos for the kitchen and 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 surrounds the audit and risk processes as more proactive than reactive unlike now. Once the house is built, no one would like to go to 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 GRC framework study.
There are two aspects needed for the actions mentioned in the discussion paper to trigger, although experts in various fields alone are taken on bank boards. Knowledge cannot be taken as something given and permanent and it requires frequent updation.

1.    Board of Directors should themselves be prepared for new responsibilities and new roles. In the first meeting of the Board, the first item of the agenda should be the series of actions ordained in the Discussion Paper of RBI 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 Board Directors away from the traditional Board meetings has potential for a free and open discussion on the issues - both internal and external to the organization. It is not common practice to have separate budget for Board management. It is good to have 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 measure.

Even mega Banks, measured by their Balance Sheets, suffer from issues that they would prefer to hide, wherein 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 9 times in a year! Depositors are minority stakeholders. It’s profit is made up out of sale of its stake in a subsidiary and not due to 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 the various other constituents. It is here that whistle blower policy implementation becomes crucial. We have seen lackadaisical responses even on RTI questions and references to the Courts for seeking responses. Such approach will not hold validity if transparency in dealing with issues that affect the persons in responsibility.

The Paper has fully accommodated the recent statement of the FM that the Banks need not be afraid of the three ‘C’s – CVC, CBI, CAG by such references being made only on Board decision  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. Hope Government of India would not raise any objection on this issue. It has been noticed thus far that the value 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 to note. It has rightly identified Risk Appetite framework as crucial for the eventual risk measurement and management. Those who cannot risk prudently cannot get reward. 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 should ensure this through its effective oversight.

While it has kept its banner line on culture and values, it could have also constituted 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 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.



 https://www.moneylife.in/article/governance-in-banks-back-on-the-drawing-board-of-rbi/60655.html

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