CORPORATE GOVERNANCE and banks

CORPORATE GOVERNANCE & BANKS
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EXECUTIVE SUMMARY
The banking scenario in India is changing fast to keep pace with the international banking practice. As a result, the banks in India have been asked to meet specific standards such as capital adequacy norms, classification of assets and income recognition Norms etc.
The main objective of this project is to introduce about the corporate governance and how the corporate governance workout in the Indian Banking Sector. This project would also provide fundamental concepts to understand about the corporate governance and Indian Banking System. The project covers emergence of the concept of corporate governance, the manner in which it is relates with banking sector, its various issues, constituents and how it is being implemented in the banking sector. The focuses mainly on some specific aspects of codes of corporate governance and is application in the banking sector.
Though outcomes of good corporate governance remains same irrespective of nature of business, type of ownership, quality of management, business/legal regulations, and political environment, but the means to achieve this good governance differs a lot based on the factors mentioned above. Some of the parameters that may influence corporate governance include ownership structure, board philosophy, industry segment, and maturity of business, management process, level of competition, international business participation, and size of the company. Lot of effort is being put both nationally and internationally in understanding and suggesting good practices that can improve governance of banking sector. In India also several initiatives have been taken up in understanding nuances of banking sector governance.

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INDEX
SR. NO.
TOPIC
PAGE NO.
1]
CORPORATE GOVERNANCE [MEANING, DEFINATION AND CONCEPT]
2]
CORPORATE GOVERNANCE IN BANKS
3]
NEED OF CORPORATE GOVERNANCE IN BANKS
4]
SCOPE OF CORPORATE GOVERNANCE IN BANKS
5]
MEASURES TAKEN BY RBI FOR IMPLEMENTATION OF CORPORATE GOVERNANCE IN BANKS
6]
PROTECT INTEREST OF INVESTOR AND CONSUMER
7]
ADVANTAGES OF CORPORATE COVERNANCE IN BANKS
8]
CHALLENGES OF CORPORATE COVERNANCE IN BANKS
9]
CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR
10]
RECOMMENDATION
11]
CONCLUSION
12]
WEBLIOGRAPHY/BIBLIOGRAPHY

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CHAPTER 1
CORPORATE GOVERNANCE: A CONCEPTUAL ANALYSIS
“Corporate Governance” has become one of the most commonly used phrases in the current global business vocabulary. This raises the question, “is corporate governance is a vital component of successful business or is it simply another fad that will fade away over time”? Nations around the world are instigating far reaching programmers’ for corporate governance reform, as evidenced by the proliferation of corporate governance codes and policy documents, voluntary and mandatory, both at the national and supranational level. We believe that the present focus on corporate governance will be maintained into the future and that, over time, corporate governance issues will grow in importance, rather than fade into insignificance. The phenomenal growth of interest in corporate governance has been accompanied by a growing body of academic research.
Modern business world demands quality, ethics and excellence, properly injected into the organization at the level of person, process and product [PPP]. To cope with this change core competency is identified and leveraged for success and all this is made possible through corporate governance. Corporate Governance is an instrument for strengthening the overall effectiveness of corporate enterprise in thecorporate world and helps to optimize the goals of corporate entities within the boundary of corporate environment. It is an important component in a long term perspectives of companies and has a leading species of large genus namely, National Governance, Human Governance, Societal Governance, Economic Governance and Political Governance.
Corporate Governance includes the policies and procedures, which is usually adopted by a company in achieving its objectives in relation to its shareholders, employees, customers and suppliers, regular authorities and community at large. Corporate Governance usually establishes a structural framework, which makes a healthy and competitive company with self – clearing and competitiveness by some strategies, transparency, motivation and social orientation. Corporate Governance plays an integral part to the very existence of a company/ organization/ Banking Sector/ Corporate Entity. It inspires and strengthens investor’s confidence by insuring company’s

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commitment to higher grow and profits [ICSI, 2003]. The further need of corporate governance includes: Protecting the rights of shareholders, making confidence among the stakeholders, strengthening the Board of Directors, providing autonomy and responsibility to the Board of Directors, providing protection to the financial and other lending institution, and to keep sustainability – economic, environment and social. Corporate Governance is a means of overcoming these problems, as it seeks to minimize the malpractices by the companies by establishing the system, where more information about the transactions of the companies or decisions taken by the management is available to the shareholders and the public. In a corporate governance system, Board of Director is the sole authority for merging the companies.
DEFINITIONS
“Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational design and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure that the corporate managers will deliver a competitive rate of return”,. www.encycogov.com, mathiesen [2002].
“Corporate governance deals with the way in which supplier of finance to corporation assure themselves of getting a return on their investment”, the journal of Finance Shleifer and vishny [1997]
“Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporations, such as, the board, the managers, shareholders and the other stakeholders, spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the companies objectives are set, and the means of attaining those objectives and monitoring performance”, OECD, April 1999.
“Corporate governance is about promoting corporate fairness, transparency and accountability”. Wolfensohn, President of World Bank.

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Corporate Governance is concern with the values, vision, visibility (VVV). It is about the value orientation of the organization, ethical norms for its performance, direction of development and social accomplishment of the organization and the visibility of its performance and practices. In Indian banking sector the corporate governance takes more vital role for their governance and growth. Due to Liberalization, Privatization, Globalization and Information Technology currently changing Indian Banking radically, corporate governance takes more crucial role for their framework. Corporate governance of banks is an essential element of a county’s governance architecture. It can have systematic financial stability implication and shape the pattern of credit distribution and overall supply of financial services. Hence the necessity and importance of enforcing effective corporate governance in the banking sector.

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GOOD CORPORATE GOVERNANCE
Role and powers of Board
Good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs and actions of its Board. The Board as a main functionary is primarily responsible to ensure value creation for its stakeholders. The absence of clearly designated roles and powers of Board weakens accountability mechanism and threatens the achievements of organizational goals. Therefore, the foremost requirement of good governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO, and the chairman of the Board. The role of the Board should be clearly documented in a Board Charter.
Legislation
Clear and unambiguous legislation and regulations are fundamental to effective corporate governance. Legislation that requires continuing legal interpretation or is difficult to interpret on a day-to-day basis can be subject to deliberate manipulation or inadvertent misinterpretation.
Management environment
Management environment includes setting-up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skills for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution.

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Board skills
To be able to undertake its functions efficiently and effectively, the board must possess the necessary blend of qualities, skills, knowledge and experience. Each of the directors should make quality contribution. A board should have the following skills, knowledge and experience. Operational or technical expertise, commitment to establish leadership, financial skills, legal skills and knowledge of government and regulatory requirement.
Board appointments
To ensure that the most competent people are appointed in the board, the board position should be filled through the process of extensive search. A well- defined and open procedure must be in place for reappointments as well as for appointment of new directors. Appointment mechanism should satisfy all statutory and administrative requirements. High on the priority should be an understanding of skill requirements of the Board particularly at the time of making a choice for appointing a new director. All new directors should be provided with a letter of appointment setting out in detail their duties and responsibilities.
Board induction and training
Directors must have a broad understanding of the area of operation of the company’s business, corporate strategies and challenges being faced by the Board. Attendance at continuing education and professional development programs is essential to ensure that directors remain abreast of all developments, which are or may impact on their corporate governance and other related duties.

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Board independence
Independent Board is essential for sound corporate governance. This goal may be achieved by associating sufficient number of independent directors with the Board. Independence of directors would ensure that there are no actual or perceived conflicts of interest. It also ensures that the Board is effective in supervising and, where necessary, challenging the activities of management. The Board need to be capable of assessing the performance of managers with an objective perspective. Accordingly, the majority of Board members should be independent of both the management team and any commercial dealing with the company.
Board meetings
Directors must devote sufficient time and give due attention to meet their obligations. Attending Board meetings regularly and preparing thoroughly before entering the board room increases the quality of interaction at board meetings. The Board meetings are the forums for Board decision-making. These meetings enable directors to discharge their responsibilities. The effectiveness of Board meetings is dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to Board meetings. Also in the present scenario, Board meeting through modern means of communication like tele-conferencing, video conferencing may be expressly allowed under law.
Board Resources
Board members should have sufficient resources to enable them to discharge their duties effectively. It includes an access for director to independent legal and professional advice at the company’s expense. The cost of supporting the Board should be transparent and reported.

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Code of conduct
It is essential that the organization’s explicitly prescribe norms of ethical practices and codes of conduct are communicated to all stakeholders and are clearly understood and followed by each member of the organization. Systems should be in place to periodically measure, evaluate and if possible recognize the adherence to code of conduct.
Strategy setting
The objectives of the company must be clearly documented in a long- term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones.
Business and community obligation
Though basic activity of business entity is inherently commercial yet it must also take care of community’s obligations. Commercial objectives and community service obligation should be clearly documented after approval by the Board. The stakeholders must be informed about the proposed and on-going initiatives taken to meet the community obligations.
Financial and operational reporting
The Board requires comprehensive, regular, reliable, timely, correct and relevant information in a formand of a quality that is appropriate to discharge its functions of monitoring corporate performance. For this purpose, clearly defined performance measures-financial and non-financial should be prescribed which would add to the efficiency and effectiveness of the organization. The reports and information provided by the management must be comprehensive but not so extensive and detailed has to hamper comprehension of the key issues. The report should be available to Board members well in advance to allow inform decision-making. Reporting should include status report about the state of implementation to facilitate the monitoring of the progress of all significant Board approved initiatives.

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Monitoring the Board performance
The Board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicator beside peer review. The Board should establish an appropriate mechanism for reporting the results of Board’s performance evaluation results.
Audit committees
Audit committee is an inter alia responsible for liaison with the management; internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the Board on the key issues. The quality of audit committee significantly contributes to the governance of the company.
Risk management
Risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analyzing and treating risks, which could prevent the company from effectively achieving its objectives. It also involves establishing a link between risk-return and resourcing priorities. Appropriate control procedures in the form of risk management plan must be put in place to manage risk throughout the organization. The plan should cover activities as diverse as review of operating performance, effective use of information technology, contracting out and outsourcing. The Board has the ultimate responsibility for identifying major risks to the organization, setting acceptable level of risk and ensuring that the senior management has taken steps to detect, monitor and these risks. The Board must satisfying itself that appropriate risk management system and procedure are in place to identify and manage risks. For this purpose, the company should subject itself to periodic external and internal risk reviews.

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CHAPTER 2
EVOLUTION OF CORPORATE GOVERNANCE IN BANKING SECTOR
There is complete uniformity now in the banking industry and the system therefore ensures responsibility and accountability on the part of the management in proper accounting of income as well as loan impairment. At the initiative of the regulators, banks were quickly required to address the need for Asset Liability Management followed by risk management practices. Both these are critical areas for an effective oversight by the Board and the senior management which are implemented by the Indian banking system on a tight time frame and the implementation review by RBI. These steps have enabled banks to understand measure and anticipate the impact of the interest rate risk and liquidity risk, which in deregulated environment is gaining importance. Prudential norms in terms of income recognition, asset classification, and capital adequacy have been well assimilated by the Indian banking system. In keeping with the international best practice, starting 31st March 2004, banks have adopted 90 days norm for classification of NPAs. In addition, norms governing provisioning requirements in respect of doubtful assets have been made more stringent in a phased manner. Beginning 2005, banks will be required to set aside capital charge for market risk on their trading portfolio of government investments, which was earlier virtually exempt from market risk requirement. All the Indian banks barring one today are well above the stipulated benchmark of 9 per cent and remain in a state of preparedness to achieve the best standards of CRAR as soon as the new Basel 2 norms are made operational. Reserve Bank of India has taken various steps furthering corporate governance in the Indian Banking System. These can broadly be classified into the following three categories: Transparency, Off-site surveillance and Prompt corrective action. However, there are many gaps in the disclosures in India vis- à-vis the international standards, particularly in the area of risk management strategies and risk parameters, risk concentrations, performance measures, component of capital structure, etc. Hence, the disclosure standards need to be further broad-based in consonance with improvements in the capability of market players to analyze the information objectively. The off-site surveillance mechanism is also active in monitoring the movement of assets, its impact on capital adequacy and overall efficiency and adequacy of managerial practices in banks. RBI also brings out the periodic data on “Peer Group Comparison” on

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critical ratios to maintain peer pressure for better performance and governance. There are three major challenges facing governance ratings in India: Firstly there does not seem to be a clear objective in relation to the capital markets. The second challenge is that there is insufficient accumulated knowledge on corporate governance and a great amount of fluidity in the theory at present and the third challenge is to assign weightings to the companies in the context of global markets. The rating agencies need to reflect on these while the regulator refrains from putting pressure to initiate a rating system for corporate governance.
The RBI Advisory Committee on Corporate Governance has defined Corporate Governance as “the system by which business entities are monitored, managed and controlled. The Board of Directors occupies a pivotal place in the scheme of Corporate Governance”. The advisory group on banking supervision” has emphasized the need for enhanced transparency and disclosures in respect of various aspects of board’s constitution and functioning. Beginning with the composition of the Board of Directors and elaborating their various functions and duties, the corporate governance code prescribes the procedures that make the functioning of Board more effective. These are:
1. As representatives of various stakeholders, it is the moral responsibility of Board of Directors to ensure that the company does not undermine moral and ethical issues in the lure of profits.
2. It is imperative for the Board to keep itself aware of the happenings in the company rather than performing perfunctory duties.
3. Through its various committees, the board should keep its fingers on the pulse of the activities besides inspecting the activity of the company. The audit committee, compensation committee, nominations committee, credit committee, risk management committee are the various sub-groups of the board that ensure that the company sticks to the corporate governance mechanisms.
4. The Board is accountable for the action of the company. It act as a governing body that controls and channelizes the resources into productive and morally right ways. It is the responsibility of the Board to ensure that proper governance practices are in place in the company. It has to keep track of the going on in the company through active involvement at the strategic and policy-making levels.

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5. The existence of outside independent directors enables the board to make an objective evaluation of company’s activities. Their position as members of the board gives them access to information which will not be otherwise available to outsiders. The independent directors are in a better position to stipulate a course of action. To increase the effectiveness of directors some of the experts have suggested the insurance of these directors for the risk they take in providing guidance or taking certain decisions.
6. The board has the duty to ensure that the management performs its duties with regard to day-to-day affairs within legal, moral and ethical bounds.
7. Board is not to act as a kind of director. It should set goals for itself and evaluate its performance. It will set an example for other to follow.
8. Board should be broad based. The directors should bring independent judgment to bear on issues of strategy, performance, resource planning and standards of conduct. They should be conversant with the banking business.
9. The board should have following committees, namely, audit committee, compensation committee, nominations committee, credit committee, risk management committee.
10. There should be an agreed procedure for directors to seek professional advice where considered necessary.

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CHAPTER 3
NEED OF CORPORATE GOVERNANCE IN BANKS
Banks and development financial institutions of India, particularly DFI’s have important role in governance of companies and where they have their nominee directors. The role of these nominee directors is to protect the interest of the institution and also as a member of the board be responsible as any other director. However, in certain instances where irregularities have been detected, the role of nominee directors has attracted attention. however, it is felt in general that theses nominee directors have a duty to act in the larger public interest. Banking is clearly a very special sub-set of corporate governance with much of its management obligations enshrined in law or regulatory codes. Governance is also a curiously two-side issue for banks since their funding and, often, ownership of other companies makes them a significant stakeholder in their own right. Governance in bank is a considerably more complex issue than in
i] Most countries including members of the International Monitory Fund [IMF]have experienced problems within their Banking community from time to time. The fact that these problems can still occur after the introduction and indeed implementation of both national and international standards and regulation gives the subject of corporate governance of banks crucial importance.
ii] It is necessary to have a clear idea, to anyone in financial management, whether micro or macro and interest in good market practice that banks are extremely important for development of a successful economy; indeed the corporate governance of such institution is integral to that development.

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iii] Banks are in unique position of effectively collecting a allowing the use of fund in given manner of enterprise. Where such funds are used in proper and consistent manner, this can lead to stable market, lower the cost of capital and accordingly stimulate growth in an economy as whole.
iv] Corporate Governance Guidelines to the bankers [i.e. directors and senior management of the banks] to allocate capital efficiently, to expert good and effective Corporate Governance in their own institutions and also to promote good practices for their costomers. This ultimately helps to generate built in discipline in the relations bank and their costomers.
v] Corporate Governance provides proper attention towards weak or improper supervision of banks which can have the disproportionate effect of destabilizing a county’s economy and indeed reducing market confidence.
vi] Corporate governance check on the various banking crises which are reasons for crippling economies, destabilized governments and in a macro sense, held back the development of less sophisticated economies and emerging nations and this results in intensified poverty.

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CHAPTER 4
SCOPE OF CORPORATE GOVERNANCE IN BANKS
I] Banks operates in a different manner to generate corporation in the delivery of their business and their position in the market. Accordingly, it is important to create, either willingly or through regulations, a degree of transparency to allow for customer & market confidence.
II] Banks are generally even in emerging economy, heavily regulated when compared toother corporations.
III] Banks have:
 A wide definition of ‘stakeholders’.
 Mechanism to avoid the issue of “systematic risk.”
 Additional regulation and compliance issues.
 The interests of depositors requiring protection.
 The need for strong internal control and risk management.
 Particular issues of related party transaction
IV] Corporate governance from a banking industry perspective also deals with, among other factors the manner in which the business andattendees of individual institutions are governed by their boarding of directory and senior management which affects how banks:

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A] Set corporate objectives
Cadburry report is a basic foundation for all the entries to prepare the basic norms w.r.t. corporate governance practices.
B] Run on a day to day basis.
C] Meet the obligations of accountability, both internally and externally.
D] Align – corporate activity and behavior.
E] Protect the interests of depositors and other customers.

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CHAPTER 5
MEASURES TAKEN BY RBI FOR IMPLEMENTATION OF CORPORATE GOVERNANCE NORMS IN BANKS
Series of efforts being made by two independent regulatory bodies in a last few years to accomplish harmonism of regulations policies and guidelines made applicable to the regulated entities. RBI has advised, on the suggestion from the SEBI that the Indian commercial banks (both public & private sector). Which are listed on the stock exchanges should adopt the guidelines of SEBI committees on corporate governance. They are as follows:
A] Optimum combination of executive and non-executive directors in the board.
B] Pecuniary relationship or transactions of the non executives directors vis- à-vis the bank.
C] Independent adult committees, their constitutions, chairmanship, power, role &responsibilities conduct of business etc
D] Remuneration of directors,
E] Periodicity/ no. of board meetings
F] Disclosure by management to the board about the conflict of interest.
G] Information/ reappointments of directors, display the quarterly results/ presentations to analysis on websites.
H] Maintenances of office by non-executive chairman
I] reviewing with the management by the audit committee of the board the annual financial statement before submission to the board, focusingprimarily on:

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 Any changes in accounting policies and practices
 Major accounting entities based on exercise the judgement of managements.
 Qualifications in draft audit report
 Significance adjustments arising out of audit compliance with standards
 The going concern assumptions.
III] The audit committee of the board may look into the reasons for default in payments to deposits debenture shareholders (non payment of dividend) & creditors wherever there are cases of default s in payment.
SEBIcommittee’s recommendations on other additional functions to be interested to the audit committee complied with by the listed banks as per listing agreements.
IV] As regards the appointment and removal external auditors, the practice followed in banks is more stringent that the recommendations of the committee and hence will continue as it is.
V] With the view to further improve corporate governance standards in banks, the following new measures are recommended:
A] In the interest of the stakeholders, the private sector and public sector banks which have issued shares to the public may form committees on the same lines as listed companies under the chairmanship of non- executive director to look into redressal of shareholders complaints.
B] All listed banks may provide in audited financial results on half yearly banks to their shareholders with summary of significant development.

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CHAPTER 6
PROTECTION OF INTEREST OF INVESTORS AND CUSTOMERS
In today’s competitive business world the businessmen have to deal with several stake holders, one of them is customers. Corporate needs to think carefully about their approach to customer service and make sure about its awareness about customers legal rights. Proper respect towards customer’s rights helps the corporate to build a good reputation and can retain their custom.
1] Customers key rights when buying or hiring goods
Businessmen or entrepreneurs must provide proper attention towards following rights:
 The goods must match the description which company or business gives to them for example, if you say a computer has an 80 GB hard drive it can’t be 40 GB.
 The goods must be of satisfactory quality- It means they must be of a standard that any ‘reasonable person’ would regard as satisfactory. They should be safe, work properly, and have no defects in their appearance or finish.
 The goods must be fit for the purpose specified. It says that, they should be capable of doing what they are meant for. For example, a watch should tell the time and if the customer said they wanted to use it while swimming and you didn’t say it was unsuitable, it should be able to perform this task.

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2] Customers rights to reject goods and claim refunds.
If customer’sbelief that goods hired or purchased from businessman is not as described fit for their purpose, or of satisfactory quality, they can reject them. Except where they are hiring or purchasing in the course of business and the fault is so slight it would be unreasonable to do so.
3] Customers key rights when buying services:
 The customer is entitled to the service defined in the contract you make with them.
 According to supply of goods and services Act every business must have to carry out work with reasonable skill and care. Provide the service within reasonable amount of time and at reasonable price.
 There should not be any discrimination among customer on any grounds.
4] Customer’s rights with credit and financial product and services
 Customers can make a claim against both the supplier and the credit provider for faulty goods.
 Since 1 Oct. 2008, every business has to provide regular statements during the lifetime of the credit agreement.
Protection of consumers against different unethical practices
A] Price:
1. Bid rigging
2. Dumping
3. Predatory pricing
4. Price discrimination
5. Price fixing

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B] Product:
1. Inferior quality
2. Adulteration
3. Faulty weight
4. Defective
C] Place:
1. Lengthy supply chain
2. Share of commission of every distribution agent in price of the commodity
3. Hoarding
D] Promotion:
1. Misleading advertisement
2. Fake offers
3. Wrong information by salesperson
Under the consumer protection act 1986, a consumer or customer is guaranteed following rights:
a) Rights to be protected against the marketing of goods and services which are hazardous to life and property.
b) Right to be informed about the quality, quantity, potency, purity, standard and price of goods and services.
c) Right to be assured.
d) Right to be heard.
e) Right to seek redressal against unfair trade practices.
f) Right to consumer protection.

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The Advantages of Corporate Governance in Banks
The potential of Corporate Governance to propel a business to greater commercial success is not generally well known. When you speak to those in business about how Corporate Governance works, you often get vague responses relating to policy, systems and processes that are established in an organization. But that explanation does not do justice to the subject of Corporate Governance. If a business is determined to grow (especially in the current lack luster business environment) then they should seriously think about introducing proper Governance into their organization.
1. Role clarity for the owners and management team
Governance permits managers and owners to delineate their roles and separate the issues of ownership (shareholding) from the management of the business. This usually facilitates faster decision making as it allows managers and owners to choose which ‘hat’ to wear depending on the issue or matter at hand.
2. Purposeful strategic direction
Corporate Governance relies on the company defining and following a definitive strategic direction. This enables the owners and/or management to apply the right resources to the most beneficial opportunities. In turn this typically leads to the quicker achievement of company goals, while minimizing wasted resources on less important activities.

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3. Retention of staff
Motivation increases when employees/staff are part of a business that has a well-defined and communicated vision and direction. This can improve staff retention which can become especially important when it comes to attracting and retaining senior talent.
4. Improved relationships with the bank
Corporate Governance enables robust and regular financial and management reporting. The resulting systematic approach to producing data will foster confidence in your business from your funders/banks as well as your investors. Improved access to capital can be another flow-on benefit from sound Corporate Governance.
5. Improvement in profitability
Governance often leads to improved reporting on performance. This means managers and owners are better equipped to make higher quality decisions that can drive an increase in sales and margins and a reduction in costs

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CHAPTER 8
CHALLENGES OF CORPORATE GOVERNANCE IN BANKS
There are several reasons for the absence of sufficient corporate governance mechanism in the Indian banking sector:
1. Multiplicity of regulations:
Banks are governed by multiple enactments. For instance, private banks are governed both by the companies Act, 1956 and the banking companies’ regulation Act and Bank nationalization Act, 1969 [amended in 1982]. The state Bank of India and its associates are governed by the state Bank of India Act, 1955 [amended in 1997]. The Regional Rural Banks are regulated by RRB Act, 1975, the co-operative banks by cooperative banking regulation Act, 1949 and Banking Laws [cooperative societies] Act, 1965. The RBI advisory group has opined that all the banks should be brought within the purview of a single act which prescribes the various practices to be followed by one and all.
2. Lack of synchronization among various corporate various corporate governance norms:
Three different committees in India have dealt with the subject of corporate governance. These are: the Kumar Mangalam Birla committee report, 2000 that had been constituted by SEBI; CH Report, 1998 and the RBI Advisory Committee Report, 2001. There is no synchronization of the regulations. Each Report has dwelt on specific issues. It would be better if a common code is prescribed after harmonizing the recommendations of various committees.

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3. Qualitative V. Quantitative:
Banking norms are quantitative the Qualitative. Governance depends more on quality of adherence to the norms in addition to quantitative yardsticks.
4. Mix-up between ownership role and regulatory role:
In most of the financial institutions, the RBI has been a majority shareholder as well as regulator. Narsimhan committee on banking reforms raised the question as to whether regulator should be owners in the context of State Bank of India. Recently RBI has vacated its majority ownership role in Securities Trading Corporation of India Ltd. And discount and Finance House of India and is in the process of divestment. There is also no justification for a regulator like RBI to be represented on the board of those regulated.
5. Mismatch between ownership pattern and board level representation: previously, when government used to be the majority shareholder in many of the financial institutions, it could have a majority representation on its board. With diversified ownership, private shareholders have begun to be given board level representation. But private shareholders representation is not commensurate with the extent of their shareholding. For instance, even with the 40 per cent shareholding private shareholders’ representation on the board may not exceed 10 to 15 per cent of the total board membership.

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6. Lackof transparency in selection of board members:
It is anybody’s guess as to what are the considerations that weigh in government’s mind in making board level appointments. To have truly professional directors, there should be a process of transparent search.
7. Board accountability:
Accountability of directors in public sector banks is another aspect on which processes have to be put in the place. Directors must be made aware as to what they are expected to do on the board. Their actual performance should be monitored and kept in view while reappointing them.
8. Lack of timely appointment of directors:
sometimes, it takes a number of years for the government to reconstitute the board of some of the public sector banks.
9. Political boards:
Very often, board level appointments in financial institutions are based on political considerations. Board appointments must remain stable and unaffected by political developments. In many cases, whole of the board has got replaced overnight.

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CHAPTER 9
Corporate Governance in Indian Bank Case Study: State Bank of India
1. INTRODUCTION
The issue of corporate governance has come up mainly in the wake up of economic reforms characterized by liberalization and deregulation. According to OECD, the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and it also spells out the rules and procedures for making decisions on corporate affairs. Corporate governance is exclusively of board of directors in a manner that it becomes a way of organizational life and not merely written rules or regulations or code of ethics. Ethics and transparency are cardinals of corporate governance.
2. WORLD SCENARIO
The seeds of modern corporate governance were probably sown by the Watergate scandal in the USA. Subsequent investigations by US regulatory and legislative bodies highlighted control failures that had allowed several major corporations to make illegal political contributions and bribe government officials. While these developments in the US stimulated debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990s led shareholders and banks to worry about their investments. Several companies in UK which saw explosive growth in earnings in the 1980s ended the decade in a memorably disastrous manner. In May 1991, the London Stock Exchange set up a committee under the chairmanship of Sir Arian Cadbury to help raise the standards of corporate governance and the level of confidence in financial

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reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The committee investigated accountability of the board of directors to shareholders and to the society. It submitted its report and the associated „code of best practices in December 1992 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the board of directors and their proper accountability. Contemporary corporate governance started in 1992 with the Cadbury report in the UK. Cadbury was the result of several high profile company collapses and was concerned primarily with protecting weak and widely dispersed shareholders against self-interested directors and managers.
3. INDIAN SCENARIO
The corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse. The initiative in India was driven by The Confederation of Indian Industry. In December 1995, CII set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in 1997. In April 1998, the code was released. It was called “Desirable Corporate Governance: A Code”. Following CII‟s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum- recommendatory code for listed companies. The Birla Committee Report submitted in February 2000 and it was approved by SEBI in December 2000. The report became mandatory for listed companies through the listing agreement and implemented according to a rollout plan. Following CII and SEBI, the Department of Company Affairs (DCA) modified the companies Act 1956, to incorporate specific corporate governance provisions regarding independent directors and audit committees.

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4. OBJECTIVES AND METHODOLOGY
The objective of the research paper is to evaluate the corporate governance practice in banking sector through a case study of the State Bank of India. For evaluation purpose, this research paper divided into two parts. Based on different elements of and with the help of secondary data, this work has analyzed and evaluated the practice of corporate governance in State Bank of India. In the first part, the concepts of corporate governance like evolution of corporate governance in world and Indian scenario, role and importance of corporate governance in banking sector has been discussed. The second part analyses the practice of corporate governance as determined in State Bank of India with the help of elements like board practices, stakeholders and transparent disclosure of information.
5. CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR
The corporate governance practice 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. Further, with restrictive support available from the government for further capitalization of banks, many banks may have to go for public issues, leading to transformation of ownership. The banks form an integral part of the economy of the country and any failure in a bank might have a direct bearing on the financial health of the country. The Basel committee on banking supervisory authorities was established by the Central Bank Governors of the G10 developed countries in 1975. The Basel committee in the year 1999 had brought out certain important principles on corporate governance for banking organizations which, more or less have been adopted in India. The minimum impact of recession on Indian economy was because of strong and effective nature of banking sector in India.

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6. CORPORATE GOVERNANCE IN STATE BANK OF INDIA
State Bank of India is the country’s largest commercial bank in terms of profits, assets, deposits, branches and employees. With over 200 years of existence, State Bank group has a presence in 33 countries and extensive network of more than 18,000 branches and 26,000 plus ATMs and 100 million accounts across the country. The only Indian Bank to feature in the Fortune 500 list, SBI has 5 Associate banks and 7 Subsidiaries arguably the largest in the world. With millions of customers across the country, SBI offers a complete range of banking products and services with cutting edge technology and innovative banking model. State Bank of India is committed to the best practices in the area of corporate governance. The sound corporate governance practice in State Bank of India would lead to effective and more meaningful supervision and could contribute to a collaborative working relationship between bank management and bank supervisors. Based on different elements like boards practices, stakeholder’s services and transparent disclosure of information the practice of corporate governance in state bank of India was assessed.
7. BOARD PRACTICES
Central Board The central board of directors was constituted according to the SBI Act 1955. The bank’s central board draws its powers from and carries out its functions in compliance with the provisions of State Bank of India Act & Regulations 1955. Its major roles include, among others, overseeing the risk profile of the bank; monitoring the integrity of its business and control mechanisms; ensuring expert management, and maximizing the interests of its stakeholders. The central board has constituted seven board level committees.

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7.1. Audit Committee of the Board: ACB provides direction as well as oversees the operation of the total audit function in the bank. Total audit function implies the organizational, operational, quality control of internal audit and inspection within the bank, follow-up on the statutory audit and compliance with RBI inspection. It also appoints statutory auditors of the bank and reviews their performance from time to time.ACB reviews the banks financial, risk management, IS audit policies and accounting policies of the bank to ensure greater transparency.
7.2. Risk Management Committee of the Board: RMCB was constituted to oversee the policy and strategy for integrated risk management relating to credit risk, market risk and operational risk.
7.3. Shareholders’/Investors’ Grievance Committee of the Board : SIGCB was formed to look into the redressal of shareholders‟ and investors‟ complaints regarding transfer of shares, non-receipt of annual report, non- receipt of interest on bonds/declared dividends, etc.
7.4. Special Committee of the Board for Monitoring of Large Value Frauds: The major functions of the committee are to monitor and review all large value frauds with a view to identifying systemic lacunae, if any, reasons for delay in detection and reporting, monitoring progress of CBI / Police investigation, recovery position and reviewing the efficacy of remedial action taken to prevent recurrence of frauds.
7.5. Customer Service Committee of the Board: CSCB was constituted to bring about ongoing improvements on a continuous basis in the quality of customer service provided by the bank.

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7.6. IT Strategy Committee of the Board: With a view to tracking the progress of the bank’s IT initiatives, the SBI‟s central board constituted a technology committee of the board. The committee has played a strategic role in the bank’s technology domain.
7.7. Remuneration Committee of the Board: It was constituted for evaluating the performance of whole time directors of the bank in connection with the payment of incentives, as per the scheme advised by Government of India. It is found that in SBI, these committees are providing effective professional support in the conduct of board level business in key areas.
8. STAKEHOLDERS SERVICES
The SBI strongly believes that all stakeholders should have access to complete information on its activities, performance and product initiatives.
8.1. Shareholders: The SBI is providing different types of services and facilities to the shareholders. Share transfers in Physical form are processed and returned to the shareholders within stipulated time. SBI has the distinction of making uninterrupted dividend payment to the shareholders at an increasing rate for many years. In accordance with the SEBI guidelines on green initiative in corporate governance, SBI is issuing annual report in electronic form to shareholders who opt for receiving the same in electronic form through their e- mails. To meet various requirements of the investors regarding their holdings, the Bank has a full-fledged department i.e. shares and bonds department and shares and bonds cells at the 14 local head offices.
8.2. Customers: With a large network and number of branches throughout India and abroad SBI is providing different types of services and facilities to the customers.

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8.2.1 ATMs: State Bank group has in its stable, variants of ATMs. The number of ATMs of the SBI group was 25,005 in March 2011 and they increased to 27,286 in March 2012. The number of ATMs of SBI was 20,084 in 2011 and they are 22,141 in 2012. The total debit cards issued by SBI were 728 lakhs in 2011 and they increased to 910 lakhs in 2012.
8.2.2 Mobile Banking: There were 10.13 lakh registered mobile customers in 2011 and they increased to 36.45 lakhs in 2012. The customers were using the service with more than 1.20 lakhs daily transactions, around 46% of which are financial transactions amounting to Rs. 2.45 crores. SBI has launched mobile technology based prepaid payment services under the brand name of State Bank Mobi Cash.
8.2.3 Internet Banking: Internet banking service is available through www.onlinesbi.co.in for both retail and corporate customers of the bank. The number of customers in March 2011 was 62.57
8.2.3 Lakhs in March 2012. The number of transactions during 2010-2011 was 1437.46 lakhs and in 2011-12 it increased to 2610.32 lakhs.
8.2.4 Foreign Offices: The SBI is operating 173 branches in 34 countries, including 2 OBUs in India to run their operations on a common banking applications software, with their databases connected to a central data centre backed up by a synchronized disaster recovery site. All foreign offices use internet banking channel and 130 ATMs at various locations abroad cater to the bank’s overseas customers with most of the ATMs connected to the centralized ATM switch in India.

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8.2.5 Customer Complaints: The number of complaints received from the customers during the year 2010-11 was 30,904 and they increased to 462,381 during 2011-12.
8.3. Employees: The SBI had a total permanent staff strength of 2,15,481 in the March, 2012. Of this, 80,404 (37.32%) were officers, 95,715(44.42%) were clerical staff and the remaining 39,362 (18.26%) were sub-staff. It has been decided to recruit 9500 new clerical staff during the year 2012-13 to meet the growing business needs of the bank. The SBI has transferred Rs. 49,518 crores to the SBI employee’s pension fund trust from the special provision account, during the year 2011-12. An amount of Rs. 4531.83 crores is recognized as an expense towards the provident fund scheme of the bank. The bank has implemented a defined contribution pension scheme (DCPS). The contributions of the bank of Rs. 452.47 crores have been retained as a deposit with the bank and earn interest at the same rate as that of the current account of provident fund. An amount of Rs. 4531.33 crores (previous year 4775.74 crores) is provided towards long term employee benefits.
8.4. Society: The executive committee of the central board has approved a comprehensive policy for corporate social responsibility in August 2011. During the year 2011-12 the SBI has spent Rs. 71.18 crores for various social service activities like supporting education (Rs. 35.33 crores), Healthcare (Rs. 15.03 crores) and donations (Rs. 5.50 crores).

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9. DISCLOSURE AND TRANSPARENCY
Disclosure and transparency are the important pillars of a corporate governance framework enabling adequate information flow to various stakeholders and leading to informed decisions. The SBI was implementing all the provisions of corporate governance and disclosure in the important and confidential information. Table 1 shows confidential information of SBI as a part of transparent disclosure of information.
9.1 Primary Business Segment Information of SBI
In the primary segment the treasury segment includes the entire investment portfolio and trading in foreign exchange contracts and derivative contracts; the corporate /whole sale banking segment comprises the lending activities of corporate accounts group, mid-corporate account group and stressed assets management group and the retail banking segment comprises of branches in national banking group, which primarily includes personal banking activities including lending activities to corporate customers. This segment also includes agency business and ATMs.

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Table: 1 SBI Primary / Geographic Business Segments during 2011-12 (Rs. In crores)
Business Segment
1.Primary Business Segment
2.Geographic Segments
1 or 2 Segments Total
Treasury
Corporate /Whole sale Banking
Retail Banking
Domestic
Foreign
Revenue
23,874 (21,665)
42,773 (32,935)
54,091 (42,062)
1,14,080 (91,086)
6,659 (5,576)
1,20,739 (96,662)
Segment Assets
3,35,016 (3,10,524)
3,94,421 (3,81,320)
5,95,182 (5,22,699)
11,55,176 (10,82,387)
1,80,342 (1,41,348)
13,24,621 (12,14,544)
Segment Liabilities
1,96,222 (1,62,149)
3,81,202 (3,67,495)
6,28,479 (5,85,015)
10,71,225 (10,17,401)
1,80,342 (1,41,348)
12,05,903 (11,14,659)
Figures in brackets are for previous year.
9.2 Secondary Geographic Segments information of SBI
In this segment domestic operations are branches/ offices having operations in India. Foreign operations are branches/offices having operations outside India and offshore banking units having operations in India.
The table-1 explains the revenue, assets and liabilities based on primary business segment with explaining treasury, corporate/wholesale banking and retail banking. The geographic segment explains domestic and foreign areas performance during 2010-11 and 2011-12.
9.3 Earnings per share of SBI
The basic earnings per share are computed by dividing the net profit after tax by the weighted average number of equity shares outstanding for the year. The net profit in 2010-11 was Rs. 8264.52 crores and it increased to Rs. 11,707.29

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crores in 2011-12. Basic earnings per share in 2010-11 are Rs. 130.16 and it increases to Rs. 184.31 in 2011-12.
9.4 Details of Different Provisions and Contingencies
The provisions and contingencies of SBI during 2011- 12 are explained in table 2. The total provisions are Rs. 17,071.05 crores in 2010-11 and they increased to Rs. 19,866.25 crores during 2011-12.
Table: 2 Provisions and Contingencies (Rs. in crores)
Provisions
2011-2012
2010-2011
Current Tax
6,335.37
5,709.54
Deferred Tax
455.93
976.82
Depreciation on Investments
683.28
646.75
Non-Performing Assets
11,494.10
8,415.44
Restructured Assets
51.76
376.65
Standard Assets
978.81
976.60
Total
19,866.25
17,071.05
9.5 Details of Concentration of Advances, Exposures & NPAs Information of SBI: Table 3 demonstrates the concentration of deposits, advances, exposures and NPAs information during 2010-11 and 2011-12. The table explains the operational weaknesses in the SBI regarding issue of advances to twenty largest borrowers, concentration of exposure with twenty largest borrowers and concentration of NPAs with four NPA accounts.

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Table: 3 Concentration of Advances, Exposures & NPAs (Rs. in crores)
Particulars
2011-2012
2010-2011
Concentration of Advances (Twenty Largest Borrowers)
83,199.80
65,236.21
Concentration of Exposures (Twenty Largest Borrowers )
2,13,774.62
2,07,277.40
Concentration of NPAs (Four NPA Accounts)
2,931.51
730.27
10. FINDINGS AND CONCLUSION
The study found that, the SBI is implementing all the provisions of corporate governance according to the RBI/GOI directions. It is found that State Bank of India, the country’s largest commercial bank, performed well in every aspect in terms of profits, assets, deposits, branches, employees and services to customers. The study found that the SBI conducted different board meetings regularly to provide effective leadership, functional matters and monitors bank’s performance.
It is found that the SBI established clear documentation and transparent management processes for policy development, implementation, decision- making, monitoring, control and reporting. Even though the SBI is showing good performance and implementing provisions of corporate governance, some lapses have to be rectified for increasing the performance. The SBI is operating nearly 10 crores of customer accounts. Among them the net banking operating customers are 89.63 lakhs, mobile banking operating customers 36.45 lakhs, customers using ATMs are 910 lakhs. Though the customers operating e-

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banking are increasing every year, they are using e-banking for normal or minimum services. It is suggested that consumer service committee must take initiative steps to increase online banking services through customer awareness programs and internet banking training programs. It decreases customer’s pressure on branches and it is useful to reduce customers waiting time in all branches. The study found that customers complains are increased during the year 2011-12 (4, 62,381) when compared to the previous year 2010-2011 (30,904). Consumer service committee must take initiative steps to satisfactorily address customers‟ complaints.
The study found that, concentration of advances to twenty largest borrowers increased from Rs. 65,236 crores in 2010-2011 to Rs. 83,199 crores in 2011- 2012 indicating credit risk. It is suggested that the credit risk management should take necessary steps to minimize risks.
The study found that concentration of exposures to twenty largest borrowers has increased from Rs. 2, 07,277.40crores in 2010-11 to Rs. 2, 13,774.62 crores in 2011-12 indicating credit risk. It is suggested that the central board should take immediate action to reduce the concentration of exposures. It is found that the concentration of NPAs total exposure to top four NPA accounts was Rs. 730.27 crores in 2010-11 and it is increased to Rs. 2,931.51 crores in 2011-21 indicating credit risk. It is suggested that the credit risk management should take necessary steps to avoid this type of concentration of NPAs. The SBI is conducting different types of social services activities in different sectors like education, healthcare and other areas as a part of social responsibility.
The amount spent for this purpose was Rs. 71.18 crores only. It is suggested that the amount must be increased for social service activities to draw public attention. Finally, this study concluded that, the corporate governance practice in the State Bank of India should improve for best investment policies,

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appropriate internal control systems, better credit risk management, better customer service and adequate automation in order to achieve excellence, transparency and maximization of stakeholder’s value and wealth.

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Recommendations
The important features of the financial sector which have a bearing on the corporate governance structure include:
1. Dominance of the public sector ownership in the financial sector whether by bank or the development financial institutions.
2. Shift away from external micro-regulation by the RBI to the internal regulation.
With the advent of economic liberalization, the ownership pattern in many public sector financial intermediaries is undergoing a change. The governments are gradually reducing its stake in these institutions. It has made many of this institution to approach the market for funding support. Before mobilizing the public investments, they must convince prospective investors that they are worth investing.
Many areas which require corporate governance practices in the banking sector can be found in narasimham committee reports (committee on financial system and committee on banking sector reform). Following suggestions therefore may be kept in view for reforming the corporate governance system in the Indian banking sector:
1. The board of directors, two third should be non-executive directors and majority of them should be independent of the institutions as well as government.
2. Of the directors, two third should be non-executive directors and majority of them should be independent of the institutions as well as government.
3. Non-executive directors should be appointed for an initial term of three years and reappointed for a maximum of three additional years.

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4. The role of chairman and chief executive should be separated and the chairman should ideally be a non-executive director. The appointment of chief-executive and other whole-time directors should be made by the board with the help of a nomination committee comprising of majority of non-executive directors. The nomination committee could have a nominee of the government or any institutional shareholder having a stake of more than 26 per cent.
5. The credit/investment committee of board should have a fair number of independent directors.
6. Audit committee comprising of independent non-executive directors should be made compulsory.
7. The compensation committee of the board consisting of non-executive directors And headed by a chairman should be the final authority to decide the compensation payable to the staff.
8. The financial institution should be brought under the regulatory and supervisory ambit of the reserve bank.
9. The management should be accountable only to general body of shareholders.
10. The regulatory practices should be aligned with international practices after making suitable modifications.

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CONCLUSION
In the present corporate world, corporate governance has takes significant role due to globalization and liberalization. The issue of corporate governance in banking sector is more complex significance because of certain factors. It is opined that the success of corporate governance in Indian banking sector depend upon well-constructed financial sector reform in line with corporate reconstructing. A piece-meal approach to such a vital sector of the economy would be of serious consequences. What is urgently required is to observe and well document of corporate governance rules and regulations. It helps the banking sector by an effective means of investors protection, fund raising ability, maximize shareholders value and finally, integrating Indian banking system with the world economy.
Corporate governance initiatives for banks become imperative for the following issues:
 Banking sector has strong linkage with real sector of the economy and they are a major source of funding and payment to all types of economic activities.
 Banking sector has mixed ownership in the form of nationalized banks, private sector banks, foreign banks and other financial institutions. The recent entry in capital markets and followed changes in the ownership of banks necessitate changes in the reporting and governance standards.
 RBI would continue the central monitory regulator in the economy through more independence and would be given in the Prime Lending Rate (PLR), operational areas and diversification opportunities available to the individual banks. This helps to enhance the profitability of the banks.

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 In times of distress, banks are generally given access to the ‘safety net’ arrangements by the RBI or the government of India. This safety net arrangement is expected to protect the payment system and the interest of the depositors. The systemic dimensions of these measures are also vital to the financial health of the economy.
 Banks are highly leveraged entities and their success/failures would have impact on the monitory sector of the economy.
 The emerging corporate governance guidelines for banks would play vital role in fulfilling broader expectation of the society.

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