Given the recent spate of governance failures in the financial sector, the regulators need to up their game
In the wake of recent corporate governance failures in the banking and financial services sector, Reserve Bank of India (RBI) released a circular on appointment of directors and constitution of committees of the banks’ boards on April 26, 2021 after extensive stakeholder consultation.
Failure of private banks
In 2004, Global Trust Bank, promoted by Ramesh Gelli, failed and was forcibly merged with Oriental Bank of Commerce, by the RBI. Global Trust Bank had excessive exposure to capital market and violated the RBI norms which precipitated its fall and loss of trust among its stakeholders. YES Bank’s case was similar before the RBI and State Bank of India came to its rescue.
Rana Kapoor’s, the then CEO of YES Bank, decisions escalated its non-performing assets (NPAs) beyond the threshold levels. The aggregate credit exposure of YES Bank on Anil Dhirubhai Ambani Group, Cox & Kings, Dewan Housing Finance Ltd., Essel group, Infrastructure Leasing & Financial Services, and Jet Airways was higher than its net worth.
The RBI did not mince words in its letter addressed to YES Bank’s board, and stated that persistent governance and compliance failures reflected on its highly irregular credit management (including divergence in NPAs), and serious deficiencies in its governance practices.
Chanda Kochhar, ex-CEO of ICICI Bank, also did not make several mandatory and appropriate disclosures which led to ‘conflict of interest’ issues.
According to the Srikrishna Committee report (2019), she was a member of credit committee of the bank that had sanctioned a loan of ₹3,250 crore to Videocon group companies, which in turn invested ₹64 crore in her husband’s (Deepak Kochhar) enterprise NuPower Renewables Ltd. The list of governance failures in the Indian private banks is endless. While some are out in the public, many are not so. As such, private banks are not holy cows in the corporate governance space.
The future path
So not all private banks’ boards are efficient and independent. The directors, including the chairman, are sometimes hand-in-glove with the CEO. The independent directors hardly have ‘independence’ as they are chosen by the MD/Chairman.
Therefore, RBI should tighten the norms related to ‘fit and proper’ criteria while selecting the directors of banks. Suitable weightage should be given to integrity, track record, expertise and qualifications of the directors of banks.
The RBI should not permit CEOs of banks to have a tenure of more than 10 years(as against 15 years). Stock options, to be exercised after five years, must be part of the top management’s remuneration package to discourage window dressing of accounts.
RBI must also appoint ‘governance officers’ to conduct business of the banks in a legal and ethical manner. By emulating the best practices of Central Bank of Singapore, RBI should be ownership-neutral, and impose heavy penalties on banks if they engage in regulatory arbitrage/mis-selling of financial services to customers.
Besides, RBI should improve its market intelligence through more on-site inspections rather than relying only on off-site surveillance (based on Risk Based Supervision) to unearth the hidden risks.
The government may have to revisit the role of RBI with regard to regulation. Given the increased complexity and dynamics of financial markets, having different regulators for banks, financial institutions, Non-Banking Financial Companies, and the like may be a better option.
There is a compelling need to protect the whistleblowers in private banks against possible reprisals.
To monitor the functioning of private banks’ CEOs, there is an imperative need to revive the shareholders’ activism by giving enough voice to the foreign stakeholders (including Global Depository Receipt holders) and minority shareholders.
There is an urgent need to infuse a sense of accountability among the top management of Indian private banks to promote a strong risk culture. Constant vigilance of private banks is the need of the hour to ensure high quality of governance, to uphold the fiduciary trust of depositors and also to prevent systemic risk thereby ensuring financial stability in the markets.
Srikanth is Associate Professor and Director (Finance), DDU-GKY, National Institute of Rural Development and Panchayati Raj, Hyderabad, and P Siva Rama Prasad is former Assistant General of State Bank of India. Views are personal