Central bank panel to review banks' governance practices

To increase transparency and efficiency in banks, the Reserve Bank of India (RBI) on Monday constituted an eight-member committee, headed by former Axis Bank chairman P J Nayak, to review governance practices in bank boards. The committee will submit a report within three months of its first meeting.

Among other aspects, the panel will look into the issue of 'fit and proper' criteria of directors, including their tenures. The move comes amid the deteriorating performances of banks, especially those in the public sector, in which the owner (the government), as well as the regulator, are represented on the boards. Not only are these banks facing headwinds on the asset quality front, which is taking a toll on their profits, their decision-making, particularly on debt restructuring, has also been questioned.

In recent times, RBI has mooted the idea of withdrawing its representation from the boards of public sector banks, citing conflict of interest. It has said a regulator cannot be part of the decision-making at a regulated entity. RBI has no representative on the boards of private banks. The new committee will review the regulatory compliance requirements of bank boards. It will also examine whether adequate time is devoted to strategy, growth, governance and risk management, besides reviewing RBI's regulatory guidelines on bank ownership, ownership concentration and representation on boards.

The panel will also review the compensation guidelines for board members. Other members of the committee include S Raman, wholetime member of the Securities and Exchange Board of India (Sebi); S Panse, chairperson and managing director of Allahabad Bank; Pratip Kar, former executive director of Sebi; Joydeep Sengupta, director of McKinsey & Company; Harsh Vardhan, partner at Bain & Company; Somasekhar Sundaresan, partner at J Sagar Associates; and Krishnamurthy Subramanian, assistant professor, Indian School of Business. Raghuram Rajan, who took charge as RBI governor in September 2013, has formed a number of committees to review the banking sector, as well as monetary policy issues. Recently, Nachiket Mor, a board member of the central bank, gave a report on financial inclusion. RBI Deputy Governor Urjit Patel heads the monetary policy committee.