Governance in Commercial Banks in India
“The earth provides enough to satisfy every man’s needs, but
not every man’s greed”
This quote is equally applicable
to all sorts of institutions particularly those engaged in Public Service.
Banks are no exception. The performance of Commercial banks in India has
reached its lowest ebb to say the least in terms of service to customers,
mobilisation of deposits particularly household savings, deployment of credit
to ensure productivity and growth in the economy and protecting the interest of
all the stakeholders in the economy Viz The Government, the tax payers,
depositors, and borrowers who include corporates, farmers, trade and commerce
both at whole sale and retail, and shareholders of banks. Less said about the Governance in Banks, the better. A simple scrutiny of the Governments’
investments in public Sector Banks and the returns Government received from the
PSBs would itself prove that Corporate Governance in PSBs has not only failed
but the very meaning of the concept of Corporate Governance does not seem to
have been understood by their Board of Directors. The very fact that banking
System has neither lived up to its potential and expectations of the
stakeholders is an added proof that Governance has failed despite all
support it gets both from the Government and the Reserve Bank. In this background, it is really a delight to
observe that RBI has at last woken up and come out with a Discussion paper on
Governance in Commercial banks in India for public comments. As a senior
Citizen and seriously concerned with the deterioration of banking and losing
its glamour as a growth engine of the economy , I would like to submit some of
my personal suggestions as a layman interested in the Economy in general and
banking system in particular.
The alarming emaciation of Corporate
Governance in banks and financial institutions is inter-alia one of the major
causes for poor growth of the economy and all round failure of disciplined
credit culture. In this context, it is very apt to quote the former Governor Dr
Urjit Patel from his forthcoming book titled Overdraft Saving the Indian Saver (Reported
in Economic Times DT6/7/2020) that “that
sovereigns do not need to earn or save before spending money. They can either
print or borrow. In our country, where they own
banks, they can use our deposits to lend and splurge for goals that may not
always be economic in nature. Many rulers have succumbed to the temptation,
with dire results - inflation, debased currency, payments crises, bankrupt
banks, economic stagnation loss of public confidence. After centuries of
ruinous experiences, some governments learnt, others haven't, to control
themselves, create self-governing Central banks and let them manage money and regulate banks. The issue of unsustainable bad debts started
as a trickle in 2015 and then became a "flood". In the forefront were
some of India's largest government banks, and a series of tycoons who were
running their empires on unpaid debts.
A. Set
the culture and value of organisation.
It is high time that The Reserve
Bank of India sets a Vision and Mission Statement for the entire Banking System
which the Banks Boards should adopt and evaluate at periodical intervals as to
where the Banks stand in adhering to the Vision and Mission. The Reserve Bank
also can have its own assessment and make it available to Parliament on an
annual basis. Accountability is that
matters and banks and RBI cannot fail to the public and the nation.
The Success of Banking is based
on Trust that it enjoys from all its stakeholders and the essence of banking is
to live up to the expectations of the Government and the Regulator in
contributing to the growth of the economy. The TRUST IN Banking is fast eroding
is the TRUTH and Truth Needs Not Many Words. It is apt to quote here Mr Atal
Bihari Vajpayee, Former Prime Minister that “We cannot Allow Peoples’ faith in
economic liberalisation to be shaken by those who do business with an ethical
deficit.” Banks have to ensure that they maintain utmost ethics and their
clients do adhere to the business ethics so that the erosion of Trust seen in
banking is restored fast and the economy and all its stake holders enjoy the
benefits. The Credibility lost in banking system needs to be regained and
restored at the earliest.
While every bank whether it is in
the Private Sector or Public Sector has its own culture and value but the
common culture and value of any bank is to mobilise deposits from the society
and deploy the same as Credit to those who can produce anything desirable for
Public Good that caters to the needs of the society. Banks in general seem to
have failed to do full justice to these two important banking functions and the
Governance seen in banks has conveniently ignored to recognise this major
failure leading to catastrophic conditions in the economy. Both these functions
require understanding of deposit customers’ and borrowers’ genuine needs
(knowing the Customers based on documents and not understanding them through
contacts as is practised now).
Unfortunately with the invasion of technology and withdrawal of human
touch, the quality of both these essential functions have deteriorated leading
to Killing of Deposit Customers and nurturing of bad borrowers with adverse
consequences in the economy. Some of these on deposits side relate to thriving
of informal and parallel banking providing even payments and settlements (the
very vital activity of banking) with extra ordinary speed, mobilising deposits
particularly through recurring deposits, Chit funds and money circulation
throughout the country without any checks and balances and ignoring the harm
that such activities bring to the society and the economy upsetting the
calculations of both the Government and the Reserve Bank in assessing the
Banking System’s Contribution in a meaningful manner. Money lenders, indigenous
bankers, black money holders thrive in the nook and corner of the country and
the banks have not penetrated deep to bring them under the banking fold. The
economic offences of different kinds do happen day in and day out as if these
activities have the sanction and blessings of the authorities.
The Value of any organisation is its contribution to the
economic growth and its accountability to the stakeholders. The organisation
should satisfy itself as to what extent it has aided the economic growth
through its advances and investments on an year to year basis and the accretion
recorded in the production of industrial products, generation of electricity
and distribution, agricultural growth and benefits passed on to various
segments as per the classification of advances envisaged and investments
deployed. The organisation should feel itself satisfied that it has achieved
both qualitative and quantitative performance and justify itself as a well
performing organisation in terms of enhanced shareholders value, depositors
delight, nurturing good borrowers taking banks as their business partners,
meeting the obligations of all its employees, regulatory requirements, miscellaneous
customers and it has not resorted to window dressing of balance sheet and its
off balance sheet items. Similarly, the organisation should feel satisfied with
regard to all its assets that they have the essential qualities of safety,
liquidity, marketability, and liquidity and it has not resorted to any trade
off with the auditors, the top management and the Regulator in safeguarding the
bad borrowers and their free loot. The Board of Directors of the Bank should be
above Board in ensuring that the quality of accounting and auditing and the
Management Information System is of highest standard and acceptable as fool
proof for the utmost integrity of all Directors.
B. Recognise
and Manage the Conflict of interest
The need for continuance of RBI nominees in
Banks’ Boards which itself involves major conflict of interest should be
reviewed and essentially they should be removed to have full exercise of
control on banks without any reservations. The Reserve Bank can easily verify
from its own records, media and press reports with regard to PSBs’ performance
over a period and how its own Nominee Directors’ fared and delivered and
problems and limitations faced by them in enhancing the Corporate Governance
standards in the banks. It is, therefore
proper that Instead of having RBI nominees in banks, RBI can have an official
well experienced and fairly senior deputed outside the board to peruse the
Board notes and minutes of Board independently and offer his observations and
comments to the Regulatory and Supervisory Department. The banks need not know
who are such nominees designated. Anonymity needs to be
maintained. These observations and comments can be well
utilised when the RBI finalises its Inspection ratings and assessment of banks’
performance. In this manner the RBI official can be free and frank in making
observations without any obligation to the Bank. The fear of his being
victimised for adverse comments if any can also be minimised if not eliminated
altogether. The Reserve bank when it receives the minutes of the Board meetings
of banks can read them along with the observations recorded by the Officer so
deputed. .
The Conflict of interests arises when the
Board of Directors of banks manage to get into banks boards through political,
bureaucratic and social connections and not satisfying themselves to the Fit
and Proper Criteria generally prescribed. Unfortunately merit of candidates to
be on the board gets a back seat and often corrupt practices play a decisive
role in identifying the Directors for the bank. The Fit and proper Criteria
itself should be reviewed and redrafted in such a way that all the Board of Directors should have excellent
academic records, professional experience and proven competence in the
management of institutions engaged in manufacturing, marketing and
distribution, investment, foreign
exchange business, agricultural finance and
rural activities, accounting , auditing, international banking and
above all highest level of integrity and
not sustainable to any external influence ignoring the interests of
banks and their stake holders. Board of Directors also should ensure
that the top management of the bank is entrusted with persons of very high
integrity, competence, experience, expertise and well proven performance in
terms of commitment, sincerity, utmost loyalty and achievement of results as
envisaged. Here also the possibility of conflict of interest and mal practices
with unheard of or unthinkable way of accommodating customers both deposit and
advance is not ruled out and this can be prevented or minimised to a great
extent with market intelligence inputs, technological support, and close
monitoring of parties and transactions. Chairmen of the banks being appointed
by the Government is often expected to dance to the tunes of some of the
powerful Directors of the Government, Politically influential Directors and
even RBI directors unless they exhibit guts at some cost to call a spade a
spade and are capable of ignoring their view points in the best interest of the
bank. This is easier said than done in practice. These things seldom happen and openly not
discussed. Of course, the visual and print media of late are seen exposing the
Directors’ weaknesses, contacts, failures etc after the event of failure of
Governance has happened in some private sector and Cooperative banks and the
depositors make a hue and cry to get back their hard earned money. Even the
Reserve Bank is seen becoming a laughing stock in the Visual media in
particular whenever a bank faces problems thanks to accumulation of bad debts
and poor recovery from wilful defaulters. The role of RBI Director is
questioned and he is often ridiculed for the poor performance of banks though
he is helpless and has his own limitations. This is avoidable if RBI nominee
works as an outsider and not as part of the Board. It may perhaps call for
Change of his designation. Instead of Nominee Director RBI official can be
designated as Observer from outside the Board.
Skill development is the need of
the hour for the Regulator to capture all kinds of manoeuvres and outsmart the
banks’ shrewdness and cunningness in manipulating the advance accounts hand in
glove with the Chartered Accountants. Penny wise pound foolish approach if any
pursued by the regulator needs to be shelved to save the economy and banks from
recurring losses. Onsite Inspections and off site surveillance of the banks cannot
and should not be compromised in the overall interest the economy. Understanding and appreciating the benefits
accruing to the economy and the society through effective regulation and
meaningful supervision should be the main criteria in the build up of knowledge
and skill development of officials both at the banks and Reserve Bank levels. It
may not out of context to emphasise here that with the advent of technology,
the banking knowledge of staff at counters and even at some middle and senior
levels is literally nil is what the knowledgeable and gullible customers feel
alike. This is a major challenge to be understood and tackled by the concerned
authorities. In the absence of provision for continuous learning and training
of staff at all levels right from subordinate staff to top management, the
expectation that the banking system can deliver and make the corporate Governance
a reality in effect, is akin to chasing a mirage. The ignorance of true banking
is literally visible and felt both in the private and public sector banks as
well.
C. Set the appetite for risk and manage risks within the appetite:
The business Risk of
each bank is different based on its area of operation, geographical spread and
its own size, expertise, client relationships and governance standards acquired
over a period of time One cannot equate State bank of India or ICICI bank with a
smallest bank operating in one or two regions without any exposure to
complicated products or business models. The Reserve bank should have at its
finger tips each bank’s strengths and weaknesses in containing various risks
and optimising performance in terms of net profit, return on equity, net non
performing assets, strengthening of balance sheet on an year to year basis,
treatment of off balance sheet items and above all how the Customers are taken
care of based on a separate rating. Customer is the foundation of any
commercial business is simply ignored or not understood both by the Board of
Directors and the top management. The Reserve Bank should have its own
parameters as a regulatory and supervisory tool to assess the various risks of
banks including Customer service and reputation risk and evaluate each bank.
The Boards’ and top Management’s contribution in managing the risks of the bank
as revealed in the Board notes and Minutes of the Board meetings should come
handy for the Reserve bank to evaluate the banks apart from its own Inspection
and offsite surveillance findings. .
Risks appetite varies from
bank to bank and there cannot be uniformity of risk management among all banks.
Banks by their very nature and tradition have their own way of specialisation
and accordingly have a tendency to bear more risks and exposures. One Size fits
all approach if any of the Reserve bank in monitoring of risks should be avoided
and there should be Bank wise profile of risks with the Reserve bank which also
should be reviewed at frequent intervals to reflect the ground realities. The
risks of various banks need to be captured and how they identify, measure,
manage and minimise risks need to be independently verified, studied and
closely monitored intensively by the Reserve bank as the Regulator to improve
the supervisory oversight of senior management. Inputs on some of the major
risks like Credit Risk, Liquidity Risk, interest rate risk, foreign exchange
risk, operational risk etc can be had from the Board notes and Minutes of the
Board and market intelligence report compiled by the Reserve Bank exclusively
on some of the major sectors of the economy and Corporates on an ongoing basis.
Credit risks arise mainly due to faulty appraisal of credit proposals and banks
’continued reliance on Tandon Chore Committee recommendations to assess the
loan requirements has its own demerits in the changed circumstances and
enhanced availability of liquidity with the banks. As per the observations of a
Chartered Accountant who has worked in Corporates for decades, with whom I had
some interactions, most of the
Corporates do not have sufficient
drawing power to cover the security of the loan and Banks are unable
to extend credit . Even monitoring of the securities
linked to the drawing power is also rendered difficult for banks with the
result, the credit pick up and the credit risk get affected to the disadvantage
of both the banks and corporates. I attach a note submitted by a Chartered
Accountant in this regard based on his experience in some Corporates. The note
is self explanatory.
As the
saying goes there is a salve for every sore. The menace of Non Performing
Advances (NPAs) under credit risk has been ruining the banks and the economy as
well and any amount of persuasion, regulation, supervision, and legal remedies
including the most successful Insolvency and Bankruptcy Code Act has not been
able to bring in the desired result is a fact and ground reality. The moment
some banks face problems, the Reserve Bank is looked down upon and incurs the
wrath of all and sundry for its regulatory and supervisory failure.
The adages
“ Prevention is better than cure” or a stitch in time saves nine hold good in
the monitoring of credit risk and arresting fresh generation of bad debts
though they are inevitable to some extent
due to abnormal circumstances beyond the control of banks and the
borrowers .The only way to prevent
formation of bad debts is to intensify the monitoring of credit risk and
rate the borrowers even under standard assets and create a fund by levying a small fine for liquidation of bad
debts without involving tax payers’ and depositors’ money. Banks also should be
made to contribute towards this fund based on their rating by the Reserve Bank
in containing the credit risk and overall performance of banks. This fund can
replace the provision coverage ratio and enhance the profitability of banks. Nothing can motivate the banker today than
effective management of credit portfolio. This fund will emerge as an effective
regulatory tool over a period and the formation of bad debts will never be a
nightmare. The Credit culture would improve, the monetary policy transmission
would turn out to be successful, and the accrual of benefits to all stake
holders of the Economy in general and banking in particular would substantially
get augmented. The Cost of funds would drastically come down once the bad debts
are taken care of innovatively and borrowers are educated to run their
businesses profitably rather than to plan the loot from banks with all
unethical ways. Transmission of monetary policy by banks to borrowers can be
made automatic by the Reserve Bank. Is not the corporate Governance expected to
reduce losses of banks and make them contribute to the Government and economy
in an identifiable manner? There is a
paramount need to ensure that the treble balance sheets problem faced by the
banks, NBFCs and corporates on account of sticky advances and wilful defaults do
not get passed on to the RBI balance
sheet directly or indirectly affecting the Financial system adversely. This in
built mechanism to contain formation of bad debts and liquidate them if at all generated
beyond the control of both banks and borrowers would prove to be a strong
immunity to discipline the borrowers and banks and save them from disaster.
SEBI can definitely play a prominent role in preventing the wilful defaulters
and fraudsters from approaching the capital market for any
facilities what so ever without referring them to banks for their clearance.
All the doors need to be closed for wilful defaulters, fraudsters branded as
looters of public funds through banks and other means.
Effective Corporate Governance at all the levels VIz Corporates’, Banks’ NBFC’s and Reserve Bank’s would definitely go a long way in placing the
Economy on the fastest track and making
the dream of India becoming a $ 5 trillion Economy a reality and a satisfying
achievement indeed. The Reputation Risk of RBI as a regulator can be contained
to a great extent. A very healthy banking system is a boon to the economy and
no efforts should be spared in making the system healthy, sound and deliver to
its full capacity and potential and reflect on the smooth and speedy growth of
the economy.
Fraud is emerging as a
major operational and credit risk and this can be tackled only if Reserve Bank
acts expeditiously based on intelligence and meaningful scrutiny of the offsite
returns and market intelligence reports on banks and corporates, The Reserve
Bank should maintain good rapport with Economic Offences wing, the Police
department, Institute of Chartered Accountants of India, CBI and Enforcement Directorate and elicit as
much information as possible on banks, corporates and individuals relating to
suspicious transactions involving banks, technology and the modes of operation.
The foreign exchange transactions especially under the liberalised environment
have become an easy source of fraud, loot and transfer of money abroad and
there is an urgent need to strengthen the Reserve Bank’s Foreign exchange
Department’s contribution in identifying the nature of fraud and detecting them
through diligent scrutiny of various returns and if necessary by on site
supervision and scrutiny of Foreign exchange transactions. There is an urgent
need to link all exports and imports transactions with overseas travels,
Investments abroad, Inflows and outflows of foreign exchange, Remittances under
Liberalised scheme, GST and Income Tax returns. Definitely something is fishy
somewhere as Criminals’ brains are far ahead of normal brains and frauds have
become a routine, and fraudsters conveniently escape the country to settle down
abroad. Only Technology can come to the rescue of the Reserve Bank.
D.
Improve the supervisory oversight of senior
management:
The Board of Directors of
banks can have an ongoing mechanism to capture suspicious transactions through
some triggers and market intelligence. The Senior Management of the Banks
should be in a position to study the weekly data relating to advances and the
ups and downs of very high order should be investigated in detail. The suspense
account fluctuations involving huge figures of suspicious nature should also be
subject to scrutiny and explanatory notes. The Asset liability management
Committee, the credit management committee, the audit committee should meet
once in a while and explore the possibilities of seeking information on
Transactions of doubtful nature and ensure that things are in order and there
is no cause for any concern. The insistence of KYC norms, PAN numbers, GSTN for
all advance customers (wherever applicable) should be a routine and no
exceptions of any kind should be allowed under any circumstances. Market
intelligence, interaction with enforcement agencies once in a while and
periodical interaction with Government, Reserve Bank, SEBI, IRDA, PFRDA and
other apex institutions like National Housing Bank, Nonbank Finance Companies
would be of immense help to strengthen the credit portfolio and evaluate the
large Corporate Clients. Chambers of Commerce, Confederation of Indian Industry,
Exporters and Importers Associations etc also should come to the rescue of
banks in minimising the frauds through their rapport with their clients.
The Reserve Bank
Inspection Report should be seen by all Board members and Senior Management.
The knowledge gap seen in the Board members and Senior Management about the
role of the Reserve bank in ensuring soundness and stability in the banking
system in particular and the expectations of the Reserve bank as to how the
banks should deliver their functions in tune with the monetary and fiscal
policies announced from time to time need to be dealt with very appropriately
On Toning up Governance in
commercial banks, the observations made in The Hindu Business Line dated
16/06/20 in their editorial column are worth examining to ensure that Reserve
Bank as is always the case keeps its Head High and delivers its
responsibilities with regard to making the banking system a very dynamic to
provide support to the Economy and all its stake holders to its full potential
without giving room for any short comings.
Corporate Governance is a
collective responsibility of the Board of Directors, top management and the
entire staff and the overall objective should be to ensure qualitative
improvement in the functioning of banks complying with all the regulatory and
supervisory prescriptions of the Regulator in letter and spirit. Qualitative
improvement should reflect in the Customer Service, efficiency in the viable
operations of banks, enhanced quality of assets, dependable profitability and
reasonable accrual to GDP growth. Banks’ continued dependence on government, tax
payers’ money and hard earned deposits of general public to cover up failures
and short comings because of poor Governance naturally would reflect poorly on
the Boards of Directors of banks and the Reserve Bank as well which can
definitely be avoided and needs to be avoided. Atmanirbhar Bharat is in the hands of
All Institutions engaged in the service of Public Good and the Reserve Bank
having earned an International Recognition for its professionalism cannot and
should not lag behind in achieving all the goals set for the Economy. Readiness and the intent are all that matter. I end this
note with a quote from our Father of the Nation “Moral results can only be
produced by Moral Restraints”. .
Dr T V Gopalakrishnan,
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