1273580,Mukta,f1,question50:-Governance of Indian banks??

 Governance in Indian banks

In banking parlance, the Corporate Governance refers to conducting the affairs of a banking organization in such a manner that gives a fair deal to all the stake holders i.e. shareholders, bank customers, regulatory authority, society at large, employees etc.
Why corporate governance in Indian banks :
The system of corporate governance is important for banks in India because, majority of the banks are in public sector, where they are not only competing with one another but with other players in the banking system as well as in financial services system including Financial Institutions, Mutual Funds and other intermediaries, in a new environment of liberalization and globalization. Further, with restrictive support available from the Govt. for further capitalization of banks, many banks may have to go for public issues, leading to transformation of ownership.
Corporate Governance and day to day management: Corporate Governance is different from day to day management of a bank, which is the basic responsibility of the operating management i.e. team consisting of the Chief Executive & top management functionaries supported by the operating staff. Corporate governance on the other hand, is to create an environment to help the operating management to enhance the stake-holders' value.
Scope of Corporate Governance : Corporate governance covers a variety of aspects such as protection of shareholders' rights, enhancing the shareholders' value, issues concerning the composition and role of the Board of directors, deciding the disclosure requirements, prescribing the accounting systems, putting in place effective monitoring mechanism etc.
Present management structure of public sector banks in India : The present structure includes Board of Directors (having Govt., RBI and shareholders nominees), Management Committee (having Govt. and RBI nominees), Audit Committee of the Board (having responsibility of ensuring the efficacy of the entire internal control and audit functions) and other advisory committees constituted by the Board. The Chairman is assisted by one whole time director and both of them are appointed by the Govt.
Parameters to judge the standard of corporate governance: There are a number of parameters on the basis of which the level of corporate governance can be judged for a banking organisation. It includes the suggested model code for best practices, preferred internal system, recommended disclosure requirements including the level of transparency, role of Board of directors and committees, reporting system to the Board of directors, policies formulated by the Board and monitoring of performance.
Important aspects of corporate governance: The following aspects require special mention while judging the standard of corporate governance in a banking institution:
a: Constitution of the Board of directors:
b: Transparency
c: Policy formulation
d: Internal controls
e: Committees of the Board
Developments concerning Corporate Governance in Indian banking : By fixing prudential standards, the regulators can improve the corporate governance and RBI has already taken a no.

Indian Scenario

Corporate Governance of Banks

Banking regulation in India shifted from prescriptive mode to prudential mode in 1990s, which implied a shift in balance away from regulation and towards corporate governance. Banks are accorded greater freedom and flexibility to draw up their own business plans and implementation strategies consistent with their comparative advantage. This freedom necessitated tighter governance standards requiring bank boards to assume the primary responsibility and the directors to be more knowledgeable and aware and also exercise informed judgment on various strategies and policy choices. With a view to strengthen corporate governance, over a period of time, various guidelines have been issued in matters relating to the role to be played by the Board, fit and proper criteria for the directors of banks, bifurcation of the post of Chairman and Managing Director (CMD), remuneration etc.

Recognizing that ownership of banks by one or few individuals could be detrimental to the public interest, especially, depositors’ interests, it is stipulated that, in India, banks should have a diversified ownership model. To ensure that ownership and control of banks are well diversified, guidelines on ownership and governance in private sector banks were issued by the Reserve Bank in February 2005. Another important regulatory prescription in this regard is the requirement of Reserve Bank’s prior approval for any acquisition of shares in private sector banks resulting in a shareholding of 5 per cent or more of the total paid up capital of the bank.
The importance of diversified ownership is also underlined in the recent guidelines on new bank licenses wherein it is stipulated that Non-Operative Financial Holding Companies (NOFHC) which set up new banks should, after the initial lock in period of five years, bring down their equity capital of the bank from the minimum 40% while setting up to 15% within 12 years. To ensure ‘Fit and Proper’ status of the groups that would set up new banks, it is also stipulated that entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years.