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CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR

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 11
CORPORATE GOVERNANCE IN INDIAN
BANKING SECTOR

DT. P. VENKATESWARA RAO,

M.A., M.Com., M.B.A, M.Phil., Ph.D.
Principal, P.C. Section, Montessori Mahila Kalasala

CH. HEMA VENKATA SIVA SREE, B.A. (ph.D.)

Assistant Professor, Dept. of Commerce, SDM Siddhartha Mahila Kalasala

INTRODUCTION
Corporate Governance has become a"bazzwofd" these days mainly
due to Globalization and is a key element in enhancing investor confidence,
promoting competitiveness and ultimately improving economic growth. It
is the set of processes, customs, policies, laws, and institutions affecting the
way corporation is directed, administered or controlled. Corporate
^
Governance in the present day conrext encompasses the interesb of ,rot
only the shareholders but also many stakeholders, which includes employees,
customers, suppliers and the community and complying with the legal and
regulatory requirements, apart from meeting environmental and local
community needs. Due to the unique role of banks in national and local
economies and financial system systems, supervisors and Governments afe
also stakeholders. A good corporate governance mechanism improves the
health of the colporate sector, thus enhancing national competitiveness.
 B7
in lndia and Challenges
CORPORATE GOVERNANCE IN INDIA CONTEXT
In India the concept of corporate governance is gaining importance
because of two feasons:

hbetd:,zattort, there has been institutionalizaion of

ftnancia]l
1. After
matkets'
markets. FlIs and FIs became dominant players in the stock
The market began to discdminate between wealth destroyers'
Corporate gorr.rit"n.. is a critical by product of market
discipline'

2. Another factor is the increased role being played by the pdvate sector'
Companiesarercahzingthatinvestorslovetostay\iliththosecorporate
rhat ireatevalues for their investors. This is only possible by adopting
fair, honest and transparent corporate practices

CORPORATE GOVERNANCE IN BANKS

Cotporate Governance has become very important for
banks to
perform uttd ,.rrruin in competition in this era of Xibetabzation
and
seflse are institutions -nrhose business is
ilobuhzui,on Banks in a broad as Commercial
f,a.rdling other people's money. AJoint stock bank also known
is banking' Protecting
Bank wtich is nothing but , ,o*putty vrhose business
of paramount interest to banks'
the interest of deBosiiors becomes a mattet
the
In banking padance,the Corporate Governance refers to conducting
affaus of a banking
orgatizaionin such a maflt:rer that gives a fattr deal to all the
stake
regulatory authority'. society at
holders ie. shareholders, bank customets'
ln banrrng
Iarge, employ-ees etc. The significance of corporate govelnance
sector weighs very much doJto
-,try nature of $anking transactions' Banking
economic development of an economy' It is
is the crucial factor effecting
thelife-bloodofacountry."Itisresponsiblefortheflowofcreditandfor
maintaining the financial balances of the economy' In India'
since the
naiorrdtzaion process banks emerged as a tool of economic
development
along with social fustice.
As per Basel committee Report 1999, Banks have to display
the

exemplary of .orporut. governance practices in their financial performance'

*rrriur.n.y in tie bali"ce sheets and compliance with other notms laid
their
do*n Uy ,..aio., 49 of corporate governance rules' Most importandy'
 BB Cood Corporate Covernance
annual report should disclose accounting ratios, relating to operating profit,
teturn on assets, business pet employee, NPAs, maturity profile of loans,
advances, investments, borrowings and depo s.its
An effective system of corporate goyeffiance in banks will impose
appropriate standards of conduct on managers and control and monitoring
procedures on banks in order to maimizeopportunities for legitimate profiti
subject to the best interests of depositors and shareholders. Good corporate
governance regulates the relationships between banks' stakeholders, their
Boards and their management. It prevents the abuse of power and self-
serving conduct, as vrell as imprudent and high risk behavior by bank
managers, and resolves conflicts of interests between manaqers and board
members on the one hand and shareholders and depositori on the other.
Indeed, the current s tate of the wodd economy is in some measure artributed
to the fact rhat boards (and rheir risk management committees) have not
propedy discharged their duties in exercising ovenight on managers engaging
in high risk activities. The corporate governance of the financial secror,
therefore, has important implications for the stability of the whole economy
From the perspective of bankingindustry, colporate governance also
includes in its ambit the manner in which their Board of Directors Eoverns
the business and affairs of individual institutions and their fuictional
relationship with senior management. This is determined by how banks:

' set cotporate objectives (including generating economic returns to

owners);
. rurr the day-to-day operations of the business and;
. consider the interests of recogtized stakeholders i.e., employees,
customers, suppliers, supervisors, governments and the community
and

' line up corporate activities and behaviors with the expectation that
banks will operate in a safe and sound manner, and in compliance
with applicable laws and regulations; and of course protect rhe
interests of depositors, which is supreme.

For ensuring good corporate governance, the importance of

overseeing the various aspects of the corporate functioning needs
to be
propedy understood, appreciated and implemented.
There are four important forms of oversight that should be included
in India and Chal
h the organizational structure of any bank in order to ensure the appropriate
decks and balances:
1. Oversight by the board of directors or supervisory board;
2. Oversight by individuals not involved in the day-to-day running of
the various business areas;
3. Direct line*supervision of different business arcas; and
4. Independent dsk management and audit functions. In addition to
these, it is important that the key personnel ate fit and proper for
their lobs.

NEED FOR CORPORATE GOVERNANCE IN BANKS

1. Banks in Ind.ia are facingincreasing competition, within and outside
India, both in terms of markets for its products and for sources of
fund. It has, therefore become necessafy for banks to constandy
reengineer, to provide the products and services to suit the ever-
changing requirements,
2. To accelefate the speed with which the transactions are completed
and to constantly evaluate and provide training to the workforce
update the knowledge and impress upon them the necessity to have
a professional and competitive approach

3. a bank with good govemance will provide them

Investofs believe that
a safe place for investment and also give better fetufns. Good
corporate Governance is, therefore, an important factot in a
competitive environment.
4. To attfact and retain the commitment of investors, customefs,
employees, Banks should ensure that they match the global
benchmarks in Corporate Governance practices

CORPORATE GOVERNANCE
IN PUBLIC SECTOR BANKS
The issue corporate govefnance in PSBs is important and also
of
complex. From the bankingindusty petspective, the attributes of corporate
 90 Cood Corporate Covernance
governance provide guidelines to the directors and the top level managers
to govern the business of banks. These guidelines relate to how banks
establish corporate aims, carry out their daily activities, and take into account
the interest of stakeholders and making sure that the corporate activities
are in tune with the pubJic expectations that banks will function in an ethical
and legal manner thereby protecting the interest of its depositors
@asel
committee, 1999). Ax these broad issues relating to governance apply to
other companies alsq but they assume more significance for banks because
they deal with public deposits directly. Banks'phiiosophy for corporare
Governance should lay emphasis on the cardinal values of 'faiiness,,
'transparency.' and'accountability', as enunciated by Wodd Bank,for
performance at all levels, thereby, enhancing the shareholders' value and
protecting the interest of the stakeholders. The Banks consider themselves
as trustee of its shareholders and should acknowledge its responsibility
towards them for creation and safeguarding shareholders' wealth. Banks
should continue its pursuit of achieving these objectives through the adoption
and monitoring of corporate strategies, prudent business plans, monitoring
of major risks of the banks business and pursuing the policies and procedurei
to satisfy its legal and ethical responsibilities. Hence, banks should aim at
enhancing the long term shareholder value while protecting the 'intetest of
shareholders, customers and other in line with international best practices.

CORPORATE GOVERNANCE
IN PRIVATE SECTOR BANKS
Private sector banks have entered niche areas, listed their scrip and
being market driven they have been more transparent in their functioning.
They have also been more tech saw1y, growth oriented and have less of
NPAs. Private sector banks has to conform with standard of good banking
practices such as

1. Ensuring a fair and transparent relationship between the customer

and bank
2. Instituting comprehensive risk management system and its adequate
disclosure
3. Proactively handling the customer complaints and evolving scheme
of redressal for grievances.
 91
in India and Ch)lbnges
4. Building systems and processes to ensure compliance with the statutes
concerning banking'

RECENT STEPS TAKEN BY BANKS IN INDIA

FOR CORPORATE GOVERNANCE
a) Induction of non executive members on the Boards
Committee'
b) Constitution of various Committees like Management
Audit committee, Investor's Grievances committee, ALM Committee
etc.
as prescribed by RBI'
.) Gradual implementation of prudential notms
d) Introduction of Citizens Chattet in Banks
.) Implementation of "I(now Your Customer" concept' the primary
responsibility for good governance lies with the Board of Directors
and the senior management of the Bank

CONCLUSION
Incompetitivebusinessenvironment,orgatizatlonsthatadootgood
coqporate governance and best practices *l bt able to survive and attain
functional
s,rsiainablJ growth levels. Pubiic Sector Banks need greater
however' needs
autonomy in-a deregulated environment' Such autonomy'
to b. by gre ter accountability on the pan of their boards to
"..t-panied
the stakeholders. A Coiporate Governance Policy shall serve
as an effective

instrument for achieving this goal. The success of corporate governafice

rests on the awafeness oith. pirt of the banks of their own responsibilities'
While law can control and regularize cettain practices' the ultimate
responsibility of being ethical and moral remains with the banks.
It is this
.ight.rrrrr.nt that would bring banks closure to their goals

The following aspects require special mention while iudging the

standard of corporate governance in a banking institution:

a) Constitution of the Board of directors

b) TransParencY
c) Policy formulation
 d) Internal controls
e) Committees of the Board
Thus Liberali zaion, Pnvaizatton and Globali zatlofr together with
Information Technology are cuffently changing the Indian banking radically.
Ea4ier, banking *as -riito4ly a monopoly of the public sector banks with
full protection from the State. But the pfocess of reforms in the Indian
ba.rki.rg system has thrown them out to more liber al and free market forces
No* the tanks, more particula4y the public sector ones, feel the real heat
of the competition. The interest rate cuts, dwindling margins and more
number of ilayers to serve a reduced number of bankable clients have all
added to the worries of the banks. The customer has finally come to hold
the center stage and all banking products afe talof-made to suit his tastes
and preferences. This sudden change in the banking environment has
bereaved the banks of all their comforts and many of them are finding
it
extremely difficult to cope with the change.
 Copyright O 201b Editors

Department of Commerce
SRI DURGA MALLESWARA SIDDHARTHA MAHILA KALASALA
Vijayawada - 520 010
Email : dr.tanneruramadevi@gmail.com
Visit us at: www.siddharthamahila.ac. in

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 CONTENTS
1 Coroorate Governance: An Ethical Perspective
Dr. Krishna Mohan Vaddadi, Pratima Merugu 1

2 Coroorate Governance In New Millennium:

A Special Reference To Banking Sector
Prof. D.P. Misra, Dr. S.K. Chaudhury 15

3 Corporate Citizenship - Role o{ LIC of India

B. Prakash Babu, Dr. P. Viswanatham 24
4 Sustainable Business through Corporate Social Responsibility
Dr. l. N'ageswara Rao 32

5 Does Corporate Governance Enhance Firm Performance?

An Empirical Literature Evidence
Raghu Katragadda, Prof. A. Sreeram 42

6 An Overview of Corporate Governance In India

Prof. T. Uma Maheswara Rao,
Dr. N. Bindu Madhavi, E. Deepa 47

7 Corporate Social Responsibility in India

Dr. L. Anuradha, V. Madhu Latha 59

B The Role ol Human Resource Management in

Corporate Social Responsibility
Dr. Nagaraju Battu 65
-?
,.--{ l,/todels of Coroorate Governance
DirfUly, Lakshmi,.Dr. K. Sudharani 73

1 0 Corporate Governance: Relevance of Epics

',,.i .& rianalSyl-Dr' V'N' sailaja 79

: 11 Corporate Governance in Indian Banking Sector

Dr. P. Venkateswara Rao, Ch. Hema Venkata Sivasree Bo

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