The concept of corporate governance, which emerged as a response to corporate failures and widespread dissatisfaction with the way many corporates function, has become one of the wide and deep discussions across the globe recently. It primarily hinges on complete transparency, integrity and accountability of the management. There is also an increasingly greater focus on investor protection and public interest. Corporate governance is concerned with the values, vision and visibility. It is about the value orientation of the organisation, ethical norms for its performance, the direction of development and social accomplishment of the organisation and the visibility of its performance and practices.
Indian Banking Industry
Indian banking has around 200 years of history and has undergone many transformations since independence. But, Liberalisation, Privatisation and Globalisation and Information Technology are currently changing the Indian banking radically.
Earlier, banking was virtually a monopoly of the public sector banks with full protection from the State. But the process of reforms in the Indian banking system has thrown them out to more liberal and free market forces. Now the banks, more particularly the public sector ones, feel the real heat of the competition. The interest rate cuts, dwindling margins and more number of players to serve a reduced number of bankable clients have all added to the worries of the banks. The customer has finally come to hold the center stage and all banking products are tailor-made to suit his tastes and preferences. This sudden change in the banking environment has bereaved the banks of all their comforts and many of them are finding it extremely difficult to cope with the change.
Need for Corporate Governance in Banks
o Since banks are important players in the Indian financial system, special focus on the Corporate Governance in the banking sector becomes critical.
o The Reserve Bank of India, as a regulator, has the responsibility on the nature of Corporate Governance in the banking sector.
o To the extent that banks have systemic implications, Corporate Governance in the banks is of critical importance.
o Given the dominance of public ownership in the banking system in India, corporate practices in the banking sector would also set the standards for Corporate Governance in the private sector.
o With a view to reducing the possible fiscal burden of recapitalising the PSBs, attention towards Corporate Governance in the banking sector assumes added importance.
Prerequisites for Good Governance
There are some pre-requisites for good corporate governance. They are:
o A proper system consisting of clearly defined and adequate structure of roles, authority and responsibility.
o Vision, principles and norms which indicate development path, normative considerations and guidelines and norms for performance.
o A proper system for guiding, monitoring, reporting and control.
Recommendations by the Birla Committee
The report of the Committee on Corporate Governance, set up by the Securities and Exchange board of India, under the Chairmanship of Kumar Mangalam Birla, is the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. The committee has identified the three key constituents of corporate governance.
The role of shareholders in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information, in transparent fashion, of the activities and progress of the company.
Board of Directors’ Role
The board of directors performs the pivotal role in any system of corporate governance. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals, and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in a transparent manner to the stakeholders.
The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it.
The Basel Committee Recommendations
The Basel Committee published a paper for banking organisations in September 1999. The Committee suggested that it is the responsibility of the banking supervisors to ensure that there is an effective corporate governance in the banking industry. It also highlighted the need for having appropriate accountability and checks and balances within each bank to ensure sound corporate governance, which in turn would lead to effective and more meaningful supervision.
Efforts were taken for several years to remedy the deficiencies of Basel I norm and Basel committee came out with modified approach in June 2004. The final version of the Accord titled ” International Convergence of Capital Measurement And Capital Standards-A- Revised Framework” was released by BIS. This is popularly known as New Basel Accord of simply Basel ll. Base ll seeks to rectify most of the defects of Basel l Accord. The objectives of Basel ll are the following:
1. To promote adequate capitalisation of banks.
2. To ensure better risk management and
3. To strengthen the stability of banking system.
Essentials of Accord of Basel ll
o Capital Adequacy: Basel ll intends to replace the existing approach by a system that would use external credit assessments for determining risk weights. It is intended that such an approach will also apply either directly or indirectly and in varying degrees to the risk weighting of exposure of banks to corporate and securities firms. The result will be reduced risk weights for high quality corporate credits and introduction of more than 100% risk weight for low quality exposures.
o Risk Based Supervision This ensures that a bank’s capital position is consistent with overall risk profile and strategy thus encouraging early supervisory intervention. The new framework lays accent on bank managements developing internal assessment processes and setting targets for capital that are commensurate with bank’ particular risk profile and control environment. This internal assessment then would be subjected to supervisory review and intervention by RBI.
o Market Disclosures The strategy of market disclosure will encourage high disclosure standards and enhance the role of market participants in encouraging banks to hold and maintain adequate capital.
Steps to be taken
To overcome from these challenges, banks are required to emphasize on certain factors, which will increase their transparency and lead to higher foreign investment.
o Self- Appraisal System: Good governance is like trusteeship. It is not just a matter of creating checks and balance but it emphasizes on customer satisfaction and shareholders value. The law regulates certain responsible areas on borrowing, lending, investigating, transparency in accounts etc. The directors, there fore, evaluate themselves through self-introspection.
o The Board’s Committees: It will be difficult for a board, with all the members acting together on some issues, to achieve its objectives effectively and with apt independence. The board, therefore, needs to be assisted by the some committee.
o Transparency: Transparency can reinforce sound corporate governance. Therefore, public disclosure is desirable in Board Structure, Senior management, Basic organisational structure and incentive structure of the bank.
Corporate governance has assumed vital role and significance due to globalisation and liberalisation. With the opening of economy and to be in line with WTO requirements, if the Indian corporates have to survive and succeed amidst increasing competition globally, it can only be through transparency in operations. The excellence in terms of customer satisfaction, in terms of return, in terms of product and service, in terms of return to promoters and in terms of social responsibilities towards society and people cannot be achieved without practicing good corporate governance.