Corporate governance in Indian banks

Introduction

The concept of corporate governance, which emerged in response to corporate failures and widespread dissatisfaction with the way many companies operate, has recently become one of the broadest and most profound debates in the world. It is based primarily on the full transparency, integrity and accountability of management. There is also an increasing focus on protecting investors and the public interest. Corporate governance is concerned with values, vision, and visibility. It is about the organization’s value orientation, the ethical standards for its performance, the direction of the development and social fulfillment of the organization 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. The aim, liberalization, privatization and globalization and information technologies are radically changing Indian banking.

Previously, banking was practically a monopoly of public sector banks with full state protection. But the reform process in the Indian banking system has thrown them into more liberal and free market forces. Now banks, particularly those in the public sector, feel the real heat of competition. Interest rate cuts, declining margins and more players to serve a reduced number of bankable customers have added to the concerns of banks. The customer has finally come to take center stage and all banking products are tailor-made to suit their tastes and preferences. This sudden change in the banking environment has deprived banks of all their comforts and many of them find 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, the special focus on Corporate Governance in the banking sector becomes critical.

o The Reserve Bank of India, as the regulator, has responsibility for the nature of Corporate Governance in the banking sector.

o To the extent that banks have systemic implications, Corporate Governance in banks is of vital 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 In order to reduce the possible tax burden of PSB recapitalization, attention to Corporate Governance in the banking sector acquires additional importance.

Prerequisites for good governance

There are some prerequisites for good corporate governance. Are:

o An adequate system consisting of an adequate and clearly defined structure of roles, authority and responsibility.

o Vision, principles and norms that indicate the path of development, normative considerations and performance guidelines and norms.

o An adequate system to guide, monitor, report and control.

Birla Committee Recommendations

The report of the Corporate Governance Committee, created by the Securities and Exchange Board of India, under the chairmanship of Kumar Mangalam Birla, is the first formal and comprehensive attempt to develop a Corporate Governance Code, in the context of prevailing conditions. governance in Indian companies, as well as the state of capital markets. The committee has identified the three key components of corporate governance.

Shareholders’ role

The role of shareholders in corporate governance is to appoint directors and auditors and hold the board responsible for the proper governance of the company, requiring the board to periodically provide them with the necessary information, in a transparent manner, on activities and progress. of the company.

Role of the board of directors

The board of directors plays a fundamental role in any corporate governance system. He is accountable to stakeholders and directs and controls management. He directs the company, establishes its strategic objective and financial goals, and oversees their implementation, establishes adequate internal controls, and periodically reports the activities and progress of the company in a transparent manner to stakeholders.

Management role

The responsibility of the management is to assume the direction of the company in terms of the direction provided by the board, put in place adequate control systems and ensure their operation and provide information to the board in a timely and transparent manner. a way that allows the board to oversee the accountability of management to it.

Basel Committee Recommendations

The Basel Committee published a document for banking organizations in September 1999. The Committee suggests that it is the responsibility of banking supervisors to ensure that there is effective corporate governance in the banking industry. He also highlighted the need for adequate accountability and checks and balances within each bank to ensure strong corporate governance, which in turn would lead to effective and more meaningful supervision.

Efforts were made over several years to remedy the shortcomings of the Basel I standard and the Basel committee adopted a modified approach in June 2004. The final version of the Accord entitled “International convergence of capital measurement and capital standards was published. A- Revised framework “by BIS. This is popularly known as the New Basel Accord for simply Basel II. Base ll seeks to rectify most of the shortcomings of the Basel Accord. The objectives of Basel II are as follows:

1. Promote adequate capitalization of the bank.

2. Ensure better risk management and

3. Strengthen the stability of the banking system.

Basis of the Basel Accord II

o Capital adequacy: Basel II intends to replace the existing approach with a system that would use external credit assessments to determine risk weights. This approach is also intended to apply directly or indirectly and to varying degrees to the risk weighting of banks’ exposure to corporate and securities companies. The result will be a reduction in risk weights for high-quality corporate loans and the introduction of a risk weight greater than 100% for low-quality exposures.

o Risk-based supervision This ensures that a bank’s capital position is consistent with the overall risk profile and strategy, thus encouraging early supervisory intervention. The new framework emphasizes that bank administrations develop internal assessment processes and establish capital targets that are commensurate with the bank’s particular risk profile and control environment. This internal evaluation would then be subject to review and supervisory intervention by RBI.

o Market disclosures The market disclosure strategy will promote high standards of disclosure and enhance the role of market participants in encouraging banks to maintain and maintain adequate capital.

Steps to follow

To overcome these challenges, banks must emphasize certain factors, which will increase their transparency and lead to more foreign investment.

o Self-assessment system: good governance is like a fiduciary administration. It’s not just about creating checks and balances, it emphasizes customer satisfaction and shareholder value. The law regulates certain areas of responsibility regarding indebtedness, loan, investigation, transparency in accounts, etc. Directors, therefore, evaluate themselves through self-introspection.

o Board Committees: It will be difficult for a board of directors, with all members acting together on some issues, to achieve its objectives effectively and with adequate independence. The board, therefore, needs to be assisted by some committee.

o Transparency: transparency can reinforce sound corporate governance. Therefore, public disclosure is desirable in the bank’s board structure, top management, basic organizational structure, and incentive structure.

conclusion

Corporate governance has assumed a critical role and importance due to globalization and liberalization. With the economy opening up and to be in line with WTO requirements, if Indian companies are to survive and succeed amid increasing global competition, it can only be through transparency in operations. . 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 responsibility towards society and people cannot be achieved without practicing good corporate governance. .