Supervisors Need To Ensure Strong Corporate Governance In Banking

It is of critical importance that banks have a strong corporate governance framework in place as they (banks) are crucial to the economy, providing financing for commercial enterprises, basic financial services to a broad segment of the population and access to payments, according to Reserve Bank of India deputy governor Vepa Kamesam.

"The importance of banks to national economies is underscored by the fact that banking is virtually universally a regulated industry, and they also have access to government safety nets," Kamesam said on Thursday, in his inaugural address at the Administrative Staff College of India (ASCI) in Hyderabad.

Alluding to the Basel Committee publication on corporate governance for banking organisations, he said it is the responsibility of the banking supervisors to ensure that there is effective corporate governance in the banking industry. Supervisory experience underscores the need of having appropriate accountability and checks and balances within each bank to ensure sound corporate governance, which in turn, would lead to effective and more meaningful supervision, he added.

 

For the banking sector, corporate governance is determined by how banks set corporate objectives (including generating economic returns to owners), run day-to-day operations of business, consider the interests of stakeholders (employees, customers, supervisors, suppliers, governments and the community).

"Banks should align their activities and behaviour with the expectation that they will operate in a safe and sound manner, and in compliance with the applicable laws and regulations; protect the interests of depositors," Kamesam said.

He said, for ensuring good corporate governance, four important forms of oversight should be included in the organisational structure of any bank to ensure the appropriate checks and balances.

Oversight by the board of directors or supervisory board, oversight by individuals not involved in the day-to-day running of the various business areas; direct line supervision of different business areas, and independent risk management and audit functions will ensure the goals of corporate governance, the RBI deputy governor added.

With regard to corporates, Kamesam said, in the absence of suitable penalty provisions it would be difficult to establish good corporate governance.

"Some of the penalty provisions are not sufficient enough to discipline the corporates. For example, the penalty for non-compliance of the stipulated minimum of 50 per cent in respect of the number of directors in the board that should be non-executive is delisting of the company's shares. This would hardly serve the purpose. In fact, this would be detrimental to the interest of the investors and to the effective functioning of the capital markets," he said.