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 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
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.
Shareholders' Role
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.
Management's Role
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 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.
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