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Every organization requires a practical framework for corporate governance. Similarly, governance for banks is crucial for the development of banking activities. The RBI (Reserve Bank of India) has brought out specific guidelines for corporate governance for banks. A discussion paper was drafted by the RBI, inviting recommendations from market participants.
Before going through the discussion paper for the governance of banks, it is essential to understand the meaning of governance. In every organization, be it government or private organization, requires a practical framework for governance. Added to this, governance in a corporate organization is called corporate governance.
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Corporate governance can be understood as the relationship between the shareholders, stakeholders, and the organization’s management. For an effective system of corporate governance, there has to be transparency between the shareholders, stakeholders, and management of the organization. Therefore, for an effective corporate governance framework, there must be a seamless transition between the above.
Corporate governance for banks is also required, as banks play a significant role in handling the financial systems of the country. Hence, the RBI brought out the discussion paper for effective corporate governance for banks.
Globalization and Privatisation have affected all businesses in the country. This has also lead to the development of financial structures in the country. With the development of financial technologies, various intricacies are present in the banking system of the country. Due to this, there is a need for a proper framework for Corporate Governance for Banks.
With changes in the banking ecosystem, various businesses have to adopt new technologies to be in line with the current standards.
Boards and authorities have to scrutinize the roles played by the following executives:
Failures in governance for banks are due to the multiple roles taken by the management of the company. For example- When the CEO takes the role of a Managing Director, or CEO takes the role of a CFO, it leads to a conflict of interest between the roles. Corporate governance for banks does not only depend on the internal framework but also depends on external factors.
The relationship between the bank’s key stakeholders would determine an efficient corporate governance framework. Apart from this, the key management executives of the bank have various duties to implement. Some of these duties form part and parcel of the organization. The primary role played by the management is managing the bank. However, key executives of the bank also have some fiduciary duties to perform in the banking system.
The main aim and objective of this paper is to understand the principles of corporate governance for banks. Apart from this, the paper also speaks about implementing corporate governance practices with international standards of corporate governance. These practices have to be according to the Basel Committee on Banking Supervision (BCBS), the Financial Standards Board (FSB), and the Bank Bureau Business (BBB).
Due to this, banks must place higher standards of governance for banks. The discussion paper emphasizes the ethical principles which apply to banks and also focuses on rule-based policies.
The provisions related to corporate governance would apply to the following:
These would not apply to any bank which does not have proper regulation under any authority.
The chairman is the head of the board of directors (BOD). All board meetings are conducted by the chairman, along with the board of directors. Apart from this, the board of directors has specific functions to carry out for the company. These functions do not end at controlling the organization. Board of directors in a bank do not have any functions related to revenue generation. Only managerial roles are carried out by the board of directors.
The following functions are carried out by the board of directors:
Apart from the above, some necessary functions which have to be carried out by directors are enumerated below:
The code of conduct can be understood as a useful framework of rules that have to be followed throughout the bank. The following would come under an active code of conduct:
Some of the values in the bank have to be addressed for effective governance for banks. When specific issues arise in banks, the timely and mannerly discussion will help in resolving such issues. Apart from this, when issues are determined at the lowest level, problems would not arise in the governance framework for a bank.
Like every organization, a bank must also develop an essential whistleblower policy that has to be implemented. However, effective implementation is not just the key; the bank must follow regular auditing of whistleblowers policy.
The whistleblower’s policy for the bank should have the following:
Any form of material alterations or material considerations in the structure of the board must be communicated to the Department of Supervision, RBI.
The board has the following responsibilities for handling effective governance for banks:
For any form of conflict of interest, an assessment must be carried out. In this assessment, the criteria for reducing the conflict must be considered.
Hence in an effective risk management framework, every bank would have three lines of defense.
The duties of directors are present in the Companies Act 2013[1]. These duties have been included in the governance of banks. The following duties have to be carried out by directors:
Apart from the above duties, the board of directors have other duties that have to be followed.
For effective governance of banks, the following committees have to be formed:
The audit committee of the board carries out the following functions:
Risk Management Committee carries out the following functions:
Nomination and Remuneration Committee carries out the following functions:
Stakeholder Relationship Committee carries out the following functions:
Also, read: Corporate Governance Failures from the Global and Indian Perspective
Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.
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