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.
