Corporate Governance in Banks
Corporate Governance in Banks
Corporate Governance in Banks
I. EXECUTIVE SUMMARY
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Banks should have clear strategies for guiding their operations and
establishing accountability for executing them. Banks also maintain
high degree of transparency in regard to disclosure of information.
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For the co-operative banks in India these are challenging times are
explained in this. The purpose and objectives of co-operatives
provide the framework for co-operative corporate governance.
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III. HISTORY
In the 20th century in the immediate aftermath of the Wall Street Crash
of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and
Gardiner C. Means pondered on the changing role of the modern
corporation in society. Berle and Means' monograph "The Modern
Corporation and Private Property" (1932, Macmillan) continues to have a
profound influence on the conception of corporate governance in
scholarly debates today.
Since the late 1970‘s, corporate governance has been the subject of
significant debate in the U.S. and around the globe. Bold, broad efforts
to reform corporate governance have been driven, in part, by the needs
and desires of shareowners to exercise their rights of corporate
ownership and to increase the value of their shares and, therefore,
wealth. Over the past three decades, corporate directors‘ duties have
expanded greatly beyond their traditional legal responsibility of duty of
loyalty to the corporation and its shareowners.
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In the first half of the 1990s, the issue of corporate governance in the
U.S. received considerable press attention due to the wave of CEO
dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. CALPERS led
a wave of institutional shareholder activism (something only very rarely
seen before), as a way of ensuring that corporate value would not be
destroyed by the now traditionally cozy relationships between the CEO
and the board of directors (e.g., by the unrestrained issuance of stock
options, not infrequently back dated).
In 1997, the East Asian Financial Crisis saw the economies of Thailand,
Indonesia, South Korea, Malaysia and The Philippines severely affected
by the exit of foreign capital after property assets collapsed. The lack of
corporate governance mechanisms in these countries highlighted the
weaknesses of the institutions in their economies.
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directors. The key roles of chairperson and CEO should not be held by
the same person.
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dividend policy
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The rise of the institutional investor has brought with it some increase of
professional diligence which has tended to improve regulation of the
stock market (but not necessarily in the interest of the small investor or
even of the naïve institutions, of which there are many). Note that this
process occurred simultaneously with the direct growth of individuals
investing indirectly in the market (for example individuals have twice as
much money in mutual funds as they do in bank accounts). In mutual
funds, however this growth occurred primarily by way of individuals
turning over their funds to 'professionals' to manage. In this way, the
majority of investment now is described as "institutional investment"
even though the vast majority of the funds are for the benefit of
individual investors.
Finally, the largest pools of invested money (such as the mutual fund
'Vanguard 500', or the largest investment management firm for
corporations, State Street Corp.) are designed simply to invest in a very
large number of different companies with sufficient liquidity, based on
the idea that this strategy will largely eliminate individual company
financial or other risk and, therefore, these investors have even less
interest in a particular company's governance.
Since the marked rise in the use of Internet transactions from the 1990s,
both individual and professional stock investors around the world have
emerged as a potential new kind of major (short term) force in the direct
or indirect ownership of corporations and in the markets: the casual
participant. Even as the purchase of individual shares in any one
corporation by individual investors diminishes, the sale of derivatives
(e.g., exchange-traded funds (ETFs), Stock market index options, etc.)
has soared. So, the interests of most investors are now increasingly
rarely tied to the fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for
example, the majority of the shares in the Japanese market are held by
financial companies and industrial corporations (there is a large and
deliberate amount of cross-holding among Japanese keiretsu
corporations and within S. Korean chaebol 'groups'), whereas stock in
the USA or the UK and Europe are much more broadly owned, often still
by large individual investors.
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VII. IMPACT
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competition
debt covenants
government regulations
media pressure
takeovers
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• Independent regulators;
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For the co-operative banks in India these are challenging times. Never
before has the need for restoring customer confidence in the
cooperative sector been felt so much. Never before has the issue of
good governance in the co-operative banks assumed such criticality.
The literature on corporate governance in its wider connotation covers a
range of issues such as protection of shareholders‘ rights, enhancing
shareholders‘ value, Board issues including its composition and role,
disclosure requirements, integrity of accounting practices, the control
systems, in particular internal control systems. Corporate governance
especially in the co-operative sector has come into sharp focus because
more and more co-operative banks in India, both in urban and rural
areas, have experienced grave problems in recent times which have in
a way threatened the profile and identity of the entire co-operative
system. These problems include mismanagement, financial impropriety,
poor investment decisions and the growing distance between members
and their co-operative society.
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The Cadbury Report stipulated that the Board of Directors should meet
regularly, retain full and effective control over the company and monitor
the executive management. There should be a clearly accepted division
of responsibilities at the head of the company which will ensure balance
of power and authority so that no individual has unfettered powers of
decision. The Board should have a formal schedule of matters
specifically reserved to it for decisions to ensure that the direction and
control of the company is firmly in its hands. There should also be an
agreed procedure for Directors in the furtherance of their duties to take
independent professional advice.
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Capital Adequacy: 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. In fact, as of 31st March 2004,
banking system as a whole had a CRAR close to 13 per cent.
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the impact of the interest rate risk and liquidity risk, which in deregulated
environment is gaining importance.
A. Transparency
B. Off-site surveillance
C. Prompt corrective action Transparency and
D. disclosure standards
Transparency and accounting standards in India have been enhanced
to align with international best practices. 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 analyse the information objectively.
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The signs are that intervention by the state in state-owned banks' credit
operations is declining. Direct intervention in decisions is being replaced
by "policy directed" lending aimed at achieving the broader social
objectives of the government in power. Increasingly decisions are based
on commercial considerations, partly stemming from the bank's public
listings and partly because of more investment in technology that brings
greater transparency and is helping to standardize decision making.
Foreign ownership of some shares in some banks and frequent
interaction with large institutional investors has maintained pressure on
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In India, CG standards are the highest among new private sector banks.
Two of these, HDFC Bank (rated on Fitch's national scale for India at
‗AAA(ind)', with an individual rating of 'C') and ICICI Bank (IDR 'BB+' on
Fitch's international scale and also with an individual rating of 'C'), are
listed on the New York Stock Exchange, and UTI Bank (rated 'AA+(ind)'
and 'C/D') is listed on the London Stock Exchange. These banks adhere
to the governance practices and disclosures expected by international
investors. The boards of these banks are reasonably broad based, with
independent directors of wide-ranging experience.
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One feature about financial reporting in the Indian banking system worth
mentioning is that some of the large state-owned banks have a number
of different auditors. This is a concern, given what Fitch has seen in the
international market place - i.e. reliance on staff from other audit firms to
complete an audit for large international groups has resulted in errors
going unnoticed. This is a resource issue in the audit firms, given the
scale of the large state-owned banks' operations.
For example, State Bank of India has 9,000 branches, Punjab National
Bank has over 5000, and Bank of Maharashtra, although smaller, still
has over 1,000 branches. In addition to the geographical spread, the
regulatory requirement for results to be audited within three months of
the year end also means that several firms have to be hired to ensure
that the audits are completed.
Typically, these audit firms form a "central committee" that looks at the
audit reports that come in from the branches and the regions and then
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discusses these jointly with the chief financial officer of the bank. As
these banks appoint auditors for only a three-year period, it has not been
feasible for one audit firm to build the necessary infrastructure in terms
of people and offices to audit these banks on its own.
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2) CODE OF CONDUCT
i. Need and objective of the Code- Clause 49 of the Listing
agreement entered into with the Stock Exchanges,
requires, as part of Corporate Governance the listed
entities to lay down a Code of Conduct for Directors on
the Board of an entity and its Senior Management. The
term "Senior Management" shall mean personnel of the
company who are members of its core management team
excluding the Board of Directors. This would also include
all members of management, one level below the
Executive Directors including all functional heads.
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4) Conflict of Interest
A "conflict of interest" occurs when personal interest of any
member of the Board of Directors and of the Core management
interferes or appears to interfere in any way with the interests of
the Bank. Every member of the Board of Directors and Core
Management has a responsibility to the Bank, its stakeholders
and to each other. Although this duty does not prevent them
from engaging in personal transactions and investments, it does
demand that they avoid situations where a conflict of interest
might occur or appear to occur. They are expected to perform
their duties in a way that they do not conflict with the Bank's
interest such as:
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• Father
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• Son's Wife
• Father's father
• Father's mother
• Mother's mother
• Mother's father
• Son's son
• Son's daughter
• Daughter's husband
• Daughter's son
• Daughter's daughter
• Brother's wife
• Sister's husband
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5) Applicable Laws
The Directors of the Bank and Core Management must comply
with applicable laws, regulations, rules and regulatory orders.
They should report any inadvertent non - compliance, if
detected subsequently, to the concerned authorities.
6) Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful
disclosures in the periodic reports required to be filed with
Government and Regulatory agencies. The members of Core
Management of the bank shall initiate all actions deemed
necessary for proper dissemination of relevant information to
the Board of Directors, Auditors and other Statutory Agencies,
as may be required by applicable laws, rules and regulations.
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i. Dos –
Attend Board meetings regularly and participate in the
deliberations and discussions effectively.
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ii. Don‘ts
Do not interfere in the day to day functioning of the
Bank.
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o Waivers
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XIX. CONCLUSION
In the years to come, the Indian financial system will grow not only in
size but also in complexity as the forces of competition gain further
momentum and financial markets acquire greater depth. I can assure
you that the policy environment will remain supportive of healthy growth
and development with accent on more operational flexibility as well as
greater prudential regulation and supervision. The real success of our
financial sector reforms will however depend primarily on the
organisational effectiveness of the banks, including cooperative banks,
for which initiatives will have to come from the banks themselves. It is
for the co-operative banks themselves to build on the synergy inherent
in the cooperative structure and stand up for their unique qualities. With
elements of good corporate governance, sound investment policy,
appropriate internal control systems, better credit risk management,
focus on newly-emerging business areas like micro finance,
commitment to better customer service, adequate automation and
proactive policies on house-keeping issues, co-operative banks will
definitely be able to grapple with these challenges and convert them into
opportunities.
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4. Less risk, at the firm and country level fewer defaults, fewer
financial crises
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• As for any firm, bank shareholder value can come from increased
risk-taking
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Studies on CG of banks:
Monitoring and risk
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What does this imply for bank CG and regulation and supervision?
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• Bank ownership
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BIBLIOGRAPHY
- By Romeo. S. Mascarenhas
WEBLIOGRAPHY
www.wikipedia.org
www.allahabadbank.com
www.allahabadbank.com
www.nfcgindia.org
www.financialexpress.com
rbidocs.rbi.org.in
www.biecco.gov.in
www.iba.org.in
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