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Money > Business Headlines > Report April 26, 2002 | 1250 IST |
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Banks may be told to pen governance standardsBS Banking Bureau The Reserve Bank of India's April credit policy is likely to direct the banks to come up with a strategy and plan for implementation of corporate governance standards as any inadequacy in this regard could contribute to their financial fragility. It may also ask them to submit progress report of implementation of corporate governance for review after 12 months to start with and thereafter half yearly or annually. It may also come out with a definition of willful defaulters following the recommendations of the Kohli Group. It has been working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters. The move on corporate governance will be in sync with the recommendations of the Consultative Group of Directors of banks and financial institutions, headed by S Ganguly. This group was set up last year, following an announcement in the RBI's credit policy, to review the supervisory role of boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-a-vis compliance, transparency, disclosures, audit committees etc and make recommendations for making the role of board of directors more effective. As a step towards effective corporate governance, the RBI could ask banks to take an undertaking from every director to the effect that they have gone through the guidelines defining the role and responsibilities of directors, and understood what is expected of them and enter into a covenant to discharge their responsibilities to the best of their abilities, individually and collectively. On the issue of appointment of directors, the RBI is likely to ask the banks - be they in the public or private sector - to involve the nomination committee of the board for carrying out proper due diligence of the directors in regard to their suitability for the post by way of qualifications and technical expertise. The central bank could reiterate the fact that in the present context of banking becoming more complex and knowledge-based, there is an urgent need for making the boards of banks more contemporarily professional by inducting technical and specially qualified individual. The independent/non-executive directors should provide effective checks and balances particularly, in widely held and closely controlled banking organisations. It is expected that the central bank will suggest to the government that while nominating directors on the boards of public sector banks should be guided by certain broad "fit and proper" norms for the directors. The central bank is expected to pitch for splitting the office of chairman and managing director in respect of large sized public sector banks. This functional separation could bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the top management of the bank. The RBI is likely to push for changing the existing legal framework so that the statutory prohibition under section 20 of the Banking Regulation Act, 1949 on lending to companies in which the director is interested is removed. This severely constricts availability of quality professional directors on to the boards of banks. ALSO READ:
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