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RBI Floats Discussion Paper on Governance in Commercial Banks, Calls for More Power to Boards

Reserve Bank of India.

Reserve Bank of India.

The paper said that growing size and complexity of India's financial system underscores the significance of strengthening governance standards in banks.

  • PTI
  • Last Updated: June 11, 2020, 11:17 PM IST
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The Reserve Bank on Thursday came out with a discussion paper to improve governance in commercial banks by adequately empowering their boards to effectively deal with issues like risk management, conflict of interest and supervisory oversight of senior staff.

Among other things, the discussion paper bats for greater power to the bank boards, separation of ownership from management and setting up of proper risk management strategy.

"The objective of the discussion paper is to align the current regulatory framework with global best practices while being mindful of the context of domestic financial system," the RBI said.

Stakeholders can send their comments on the discussion paper by July 15, 2020. The paper said that growing size and complexity of India's financial system underscores the significance of strengthening governance standards in banks.

Recent events in a dynamic and rapidly evolving financial landscape have led to increasing scrutiny of the role of promoter(s), major shareholder(s) and senior management vis-a-vis the role of a board.

"In the context where management plays the role of an agent of a board and the board in turn plays the role of an agent of shareholders, governance failures have brought to fore the impact of quality of governance on efficiency in allocation of resources, protection of depositors' interest as well as maintaining financial stability," it said.

The bank board, as per the discussion paper, should set the culture and values of the organisation; recognise and mange conflict of interest; set the appetite for risk and manage risks within the appetite; and improve the supervisory oversight of senior management.

On the responsibilities of the board, the paper said, "A fundamental component of good governance is a culture of reinforcing appropriate norms for responsible and ethical behaviour."

"These norms are especially critical in terms of a bank's risk awareness, risk-taking behaviour and risk management. To promote a sound culture, the board shall reinforce the 'tone at the top'," it said.

It further said there should be a code of conduct or comparable policy which shall define acceptable and unacceptable behaviour.

The board should have a formal written 'conflicts of interest' policy and an objective compliance process to ensure implementation of the policy.

Also, "the board shall take an active role in defining the risk appetite, ensuring its alignment with the bank's strategic, capital, financial plans and compensation practices."

The board should approve an approach, oversee the implementation of key policies pertaining to the bank's capital adequacy assessment process, including capital raising plans, liquidity plans, compliance policies/ obligations, and the internal control system, it said.

The paper also talks about the qualification and selection process of board members. It further said the board should constitute a Nomination and Remuneration Committee (NRC) made up of only non-executive directors (NEDs).

It also said the board of directors of a bank should comprise not less than six directors and not more than 15 directors with majority being independent directors.

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