RBI has put in its web site for public comments a discussion paper titled ‘Governance in commercial banks in India’. The objective of the discussion paper is to align the current regulatory framework with global best practices while being mindful of the context of domestic financial system. Accordingly, some of the major highlights of the paper are as follows: (from RBI letter enclosing the discussion paper)
‘i. Empower the Board of Directors to
- set the culture and values of the organization;
- recognize and manage conflicts of interest;
- set the appetite for risk and manage risks within the appetite;
- improve the supervisory oversight of senior management;
ii. Empower the assurance functions through various interventions;
iii. Achieve clear division of responsibilities between the Board and the management; and
iv. Encourage the separation of ownership from management.’
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DISCUSSION08CA382F39604B10B420A8A43B0DB0C1.PDF
Naturally, RBI wants the feedback from all stake holders like yourself, myself or others who are depositors, debtors, investors, bond holders and all who have stakes in the existence of commercial banks in India.
I would show the contents with chapters as follows but we shall discuss most of the important information enclosed therein. How far they are important, whether old wine is in new bottle or competition to meet world standards in governance in commercial banks has forced the coveted RBI to act wisely can be analyzed. In fact, it wants all stakeholders to send their comments to dpcg@rbi.org.in. Obviously, I shall send my views/suggestions as observed from 40 years of relationship as an ex- employee, investor, registered as insolvency professional or as a CPA who has studied the financial institutions in a few countries over the past 4 decades.
Our discussion starts now:
Paragraphs ranging from 1 to 17 with a report ranging for 72 pages constitute the discussion paper, interspersed with extensive quotes from its past. Let me narrate the paras.
“1 Background 5 (5 indicates page from the discussion paper. Similar is the case under 2, 3, …)
2 Applicability 6
3 Definitions 7
4 Overall responsibilities of the board of directors 10
– Culture and values 10
– Recognizing and managing conflict of interest 13
– Risk appetite, management & assurance 15
– Oversight of senior management 19
– Other responsibilities 20
-Duties of a director 23
5 -Board’s structure and practices 26
– Committees of the board 27
-Audit Committee of the Board 27
-Risk Management Committee of the Board 33
– Nomination and Remuneration Committee 39
-Stakeholders Relationship Committee 42
– Committees of the board performing management function 42
-Composition of the board 43
-Role of the Chair 43
6 Qualification and selection of board members 44
-Board members’ qualifications 44 -Board members’ selection 46
7 Senior Management 49
Role and expectations 49
Selection/appointment 53
8 Risk management 55
9 Compliance 59
10 Secretary to the board 63
11 Internal audit 64
12 Vigilance 67
13 Compensation 71
14 Interpretation 72
15 Transition 72
16 Disclosure and transparency 72
17 Repeal”
Views expressed by the discussion paper chapter wise is covered here in simpleton’s language, since the banks in India are run for a common man with robust common sense, if not associated with the bookish knowledge.
We shall analyze subject wise:
No. 4. Overall responsibilities of the board:
“These responsibilities articulated in following paragraphs in substantive terms are to be met by the board/committees of the board by setting agenda for its meetings and actions emanating therefrom as recorded in minutes of the meetings.
The board/ committees of the board shall maintain appropriate records of their proceedings at each meeting, including minutes of meetings, summaries of matters reviewed, main discussions, individual director’s views, dissenting opinions, decisions taken, recommendations made and board resolutions.
Minutes of the meetings of the board/committees of the board are to be signed by the chair of the meeting. In all matters related to meetings of the board and its committees’ compliance shall be ensured inter alia with guidance issued from time to time by the Institute of Company Secretaries of India (ICSI).”
Let us explain in our language.
- Responsibilities of the board – culture and values: To establish tone at the top, the board to strive to establish the bank’s culture and values, oversight over the ethical behavior and communicate the same with professional behavior among all layers of management. By having an effective whistle blower policy, illegal activities at all levels will be controlled.
- In view of the ethical behavior, written conflicts of interest policy need explicit establishment and conveying among key management personnel including the board members.
- Managing risk management, by establishing clear demarcations of both qualitative and quantitative limits, enforce periodical practice of the risk management and also involve people at all levels to practice risk levels are required at board level policy making on the same.
The Board should have complete oversight on bank’s business strategy, business goals and financial soundness at all decision making by having systematic communication at its level as well as down the lane.
Board is entirely responsible for overseeing regular observance of the bank for regulatory/statutory and other disclosures to authorities like central government or RBI and other regulatory authorities.
Our views
One would like to ask RBI what happened with massive frauds at most of the public sector banks or private sector banks both in money laundering and gross misuse of public funds all at the expense of a simple depositor or a common man who struggles to get even a car/scooter or consumer loan with baggage or procedural wrangles. C M Ds of all types of financial institutions had a field day with the best of rules and regulations quoted by RBI for establishing the above noble standards. Can we get a clear and unambiguous declaration that not only the rules would be made but also be enforced and supervised without dereliction of duties at regulatory levels and Ministry of Finance levels?
Duties of a director
India is fond of written materials which go around the world many times if one has to place them in arranged lines. Yes, my observation has been reinforced by placing of 31 attributes of a director by RBI discussion paper.
I simply demand that a director of a bank, apart from fulfilling all regulatory/legal requirements must be honest, serve with no intention to misuse the resources and follow all rules/regulations sincerely. Can one totally ensure that all 31 attributes of a director would be met by any- one?
I sincerely doubt the RBI statements which are of academic excellence with no intention to enforce of them. How will RBI ensure any director appointed by central government due to all types of considerations, all reportedly noble, will work sincerely? Commercial banking is purely a business model and religious persons do not adorn the robes of a director. The country can tolerate so long repetition of Nirav Modi or notorious absconders are not repeated. Companies Act 2013 and further fortified by amendments has stipulated various conditions to be a director. I do hope the same do hold good for a director of a commercial bank. However, you may refer para 5 at page 44 of the discussion paper for details. My sincere prayers for competent people as directors with honest intentions to serve. Most of the banks pay them reasonably to take care of their needs. Enormous perquisites do enhance their comforts.
Role of a chair
Quoting from page 43 of the discussion paper on the above subject “The chair provides leadership to the board and is responsible for its effective overall functioning, including maintaining a relationship of trust with board members. The chair shall possess the requisite experience, competencies and personal qualities to fulfill these responsibilities.”
Let us review the past performances of CMD(Chairman and Managing Director) of a few public sector banks like PNB, Allahabad Bank or any other one (nearly 5 or more CMDs of public sector banks are under CBI investigations or charge sheet), CMDs of Yes bank, Axis bank, ICICI bank among bigger ones and myriad number of small banks have erred on ethical/business/conflict of interest principles and have incurred huge losses to these banks. It is the common depositor who lost heavily in many small banks.
One expects RBI to learn from experience and enforce strict supervision and monitoring over the functioning of both public and private sector banks. Theoretically their prescriptions for a Chair is unassailable but needs practical enforcement of its writ at all levels.
I only wish that the Chair would listen to dissenting voices of the board particularly if the loan proposals of any one in any way linked to any board/Chair is discussed without any interruption and dissenting voices recorded properly. In history, one often hears of a dominant CMD overruling all Board members towards achieving his agenda.
Senior management
The discussion paper means senior management as those in charge of operations and in the first line of operations who face the clients and direct the business of the bank. They generally report to the board on:
“(a) changes in business strategy, risk strategy/risk appetite;
(b) the bank’s performance and financial condition;
(c) breaches of risk limits or compliance rules;
(d) internal control failures;
(e) legal or regulatory concerns; and
(f) issues raised because of the bank’s whistle blowing procedure.”
Frank discussions hardly take place in the board along the above lines. Boards hardly meet 3-4 hours and the minutes of the board along with detailed discussion that preceded the minutes are hardly available and discussed in public. One can easily ask” how is that ICICI bank one of the largest and award-winning private sector bank, next only to SBI but in private sector allowed undue favors to the relatives of the then CMD who is under investigations of regulatory or police authorities.”
I sincerely wish and pray that RBI learns from its past and ensure non repetition in future. Equally, government departments who depute its senior officials to work as nominee bank directors are to ensure that proper monitoring or required expertise in banking business is available in the government departments and allowed to play the required expertise. Accountability in financial discipline has to be ensured at all cost. Passive roles are no more required. Any director of a bank either public sector or private sector can’t take the stand of non-blame just being a nominee director. Action could be taken against the whole board if misuse or laundering of money has been enabled by the bank in a massive scale which can be fixed by RBI in consultation with the concerned banks.
Risk management
Little Oxford Dictionary on page 599 defines risk as the possibility that something bad will happen. Naturally, with the emerging unreliable or unpredictable business scene which has emerged all over the world, risk management in banks have become part of normal business functioning.
The discussion paper (over 1 to 19 seriatim points) explains how risk functions at all levels would be encouraged, limits fixed for activities at all levels, all forced to learn the basics of risk and leave the aversion to take risks. It has been suggested that the Risk Management department unfettered to all types of information at all levels would establish the risk policies, account for qualitative/quantitative levels risk at all levels, experiment with expected scenario and ensure the board of its preparedness to face various situations that may/may not emerge.
Let me explain the situation for a common man.
- As a current account holder and a business man, you need temporary overdraft over the loan limits fixed by the bank. Can the branch manager take a decision and allow and up to what level the loan limits be extended? As a branch manager or at administrative office dealing with operations or even in audit functions, this is not an unexpected development. But if it exceeds the limits, what happens is risk management.
- Let us recollect the rogue foreign exchange dealer in UK who exceeded his powers and hedged up to $ 2 billion of a bank’s money and as a result the bank became bankrupt but the history recollects its noble service to the nation for nearly 200 years, all due to its common service to depositors of all hue and extension of advances to millions of common men. Lack of risk management and setting up of limits and how to cope with the would-be situation resulted in disastrous consequences. An almost similar episode happened with Punjab National Bank, as narrated by its Balance Sheet for the year 1918-19 but due to its timely action at Board/RBI/Government and with the expert handling of the law enforcement authorities, it averted a collapse and as per latest reports, it may come out of the situation successfully.
- As an ex banker, I would actually like the banks to narrate an actual situation explained or felt by the banks and the way in which they would cope up with. It will be interesting if a white paper is published by RBI on the banking scene for the C virus which seemed to have wrecked the economy. But can’t the banks with unlimited funds and talented man power envisage at their level with risk management and come out with solutions with out actual happening of the events.
- Discussion paper gives details of the establishment of risk function at all levels and detailed technical instructions which one can study from pages 55-59.
Compliance
It is a pleasure to hear how RBI discussion paper has defined compliance. I am just reproducing its statement.
Compliance risk is “the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer because of its failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to its activities”.
It is needless to emphasize compliance functions which forms the mirror to outside world as the happening in the bank as desired by regulatory/legal/governmental/local authorities. The list is endless and a commercial bank actually knows what it is supposed to report after complying with the requirements. With the computerization of systems, a conscious effort to meet expectations of laws would be appreciated but similarly avoidance of required compliance may invite undesired results.
The head of compliance function, to be designated as ‘Chief Compliance Officer (CCO)’ has been recommended. Pages 59-62 explain in sequence the requirements and the results in case of non- observance too.
Internal audit
The back bone of any organization rests on its audit function undertaken by its internal audit department which will directly report to its Board through Audit committee to be headed by an independent director, almost in all cases by an experienced banker with full scale banking experience along with CA credentials and also extensive training with internal procedures, both theoretical and practical.
Many of the public sector and private sector banks pride themselves with the best audit departments over many decades. The suggested steps narrated in pages 64-67 will invite the attention of any top managements for proper implementation. It is our fervent request that this audit department without fear or favor discharges its duties as expected by laws/RBI directives or internal regulations. Punjab National Bank has one of the excellent audit departments in the country.
I expect more importance is given to internal audit department and also Vigilance department which has been facing flak for its role in distracting the attention of bankers from their aggressive business activities. While vigilance is an unavoidable function of any modern banking, restraining of normal banking due to the fear created by the functioning of vigilance department is avoidable in nature and without risk appetite, growth is impossible particularly with the emergence of new challenges from new emerging entrepreneur who have crossed the banking of past two hundred years of service with mind boggling new products. Just Paytm, alone, sends shivers among bankers even in rural areas.
Conclusion
In a classic discussion paper issued by RBI, I could contribute little by my comments which will be communicated by me to them later on. I want to emphasize the simple principle of our half naked fakir, as popularly called in the west, namely the father of our nation, most respected and Saintly Mahatma Gandhi who wanted the common man to be served by all businesses, however advanced they may be and also in any field of operation. He just called the customer the purpose of business and not the interference. I just remember his Saintly advice for implementation by all commercial banks in their Governance, beautifully guided by RBI by its expert advice in its discussion paper.
Expected to be implemented after getting feed back from all stake holders, from April 1, 2021, the latest date of implementation, these guidelines will usher in a new decade of excellent Governance.
During the period banks shall ensure that its Memorandum of Association/Articles of Association/ any agreements/ board of director or shareholder resolutions/ composition of the board and the committees of the board are consistent with the new guidelines/directions as well as applicable statutes/regulations.
I expect a brighter future for all commercial banks in India. Have a risk appetite but within the limits, enlarge the territories of operations, hasten with peace and let service motive serve all stake holders in their search for enlarging the capital.
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