RBI advocates massive reforms to governance in commercial banks

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A discussion paper on ‘Governance in Commercial Banks in India’ was released by RBI recently. The adequacy of the existing legal regime for ensuring good governance in commercial banks is in question due to the occurrences of high-profile instances involving governance failures in certain banks. Internationally, the question of governance standards in banks is viewed differently given the dynamic nature of the functions that banks perform in comparison with other companies, which render them critical to resource allocation in the economy, customer interest security, and financial stability maintenance.

The stated goal of the discussion paper is to align the existing regulatory structure on banking governance with global best practices, including recommendations provided by the Basel, Banking Supervision Committee and the Financial Stability Board. To this end, it adopts international banking governance principles into India’s general corporate governance system comprising the Companies Act, 2013, and India’s Securities and Exchange Board (Listing Obligations and Disclosure Requirements) Requirements, 2015. Broadly speaking, these governance principles concentrate on board of directors, board structure, and procedures obligations which include aspects of risk control, internal audit, enforcement, whistleblowing, accountability, disclosure, and transparency.

A key issue that has arisen from the recent episodes of bank-governance lapses is concentrated promoter-shareholding and the related governance risks. So one of the most radical proposals in the discussion paper is about separating ownership from management to “reinforce a culture of professional management” at commercial banks. The paper proposes the tenure of a full-time director (WTD) or CEO serving a founder or major shareholder to a term period of the term. This measure is intended to complement the regulatory structure of RBI requiring restrictions on the shareholding of promoters and related voting rights.

Notably, RBI also formed an internal working group to review the existing regulatory guidelines on private sector bank ownership and control, which is expected to submit its report by September 30th, 2020. 

Other key recommendations in the paper can be summarized as follows : 

( 1) the majority of the board of directors of a commercial bank must consist of independent directors (a requirement higher than that laid down in the Companies Act and the SEBI Regulations)

(2) the board chair must be an independent director

(3) the chairpersons of important board committees (the audit committee, the risk management committee and the appointment and remuneration committee) must be independent directors who are not chairpersons of any other board committee

(4) the term of non-promoter CEOs and Whole Time Directors should be limited to 15 years. 

Overall, the proposals in the discussion paper aim to improve the governance standards of banks in India, especially in the wake of recent issues that have drawn substantial public attention and criticism.

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