Commercial Bank boards will reinforce the tone at the top: RBI

RBI proposed that lenders put an approved policy in place on adopting auction-based models for price discovery

MUMBAI: : The Reserve Bank of India (RBI) on Thursday issued a discussion paper to set new and contemporary standards of governance at commercial banks. The discussion paper lays higher responsibilities on the bank board to ensure that the banks as agents of financial intermediation maintain highest standards of governance and avoid conflict of interest.

“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," said RBI in the discussion paper.

This comes in the backdrop of two recent cases of governance failures at private sector lenders. One involved ICICI Bank where its former CEO, Chanda Kochhar had to step down in the midst of allegations conflict of interest, quid pro quo and that her conduct violated banks code of conduct in 2018. The more recent case involves Yes Bank where its founder and former chief Rana Kapoor has been chargesheeted by Enforcement Directorate on charges of allegedly taking kick-backs while granting high value loans.

RBI said that bank’s board would have oversight over the code of conduct policy. The code of conduct would include issues such as explicitly disallowing illegal activity, such as financial misreporting, misconduct, economic crime including fraud, breach of sanctions, money laundering, anti-competitive practices, bribery and corruption, or violation of consumer rights.

All stakeholders will have the means to raise concerns about ethical and legal issues in the bank. The board will have an oversight including approval of how, by whom legitimate material concerns shall be investigated and addressed.

By an objective independent internal or external body or the board itself. Material concerns will be raised with department of supervision RBI, said the central bank in the discussion paper.

“The ultimate responsibility for ensuring accountability for misconduct lies with the board. Board shall also oversee compensation that promote prudent risk taking, identify tools to address issues of misconduct," said RBI.

The board will have to form a written conflict of interest policy. Review and approval process to ensure that directors are aware what activities could lead to conflict of interest.

A director should abstain from voting or influencing in any matter where there is a conflict or the director’s objectivity is affected. Adequate procedures to ensure that all the transactions are taken on arm’s length basis, the RBI.

The central bank also laid heavy emphasis on having a strong internal audit mechanism and vigilance system.

Vigilance will assist the board to achieve its goal by ensuring that all transactions are carried out as per systems, procedures while minimising the scope of malpractices/misconduct and misuse of funds.

According to the RBI discussion paper, the board of directors of a bank shall comprise not less than six directors and not more than 15 directors with majority being independent directors.

"The board shall meet at least six times a year and at least once every sixty days. All meetings of the board should have a majority of independent directors and shall meet with a quorum of five members," the paper said.

The paper stresses that the bank will have to convince the RBI that the independence of directors is in substance and not just words.

"It must be ensured that the minutes of the meeting of the board as well as its committees are so recorded that it shall be possible to appreciate the quality of deliberations including individual directors view on the matter, independence of directors, critical decisions made, dissenting views expressed and discussed within the decision-making process," the paper added.

The paper also mentions various measures that bank should take care of when appointing a director to its board. The bank will need to ensure not to award any professional work to a person who was a director of the bank, for a period of two years after such person has demitted the directors office.

The paper also lays out various measures to ensure proper conduct of various committees of the board - the audit committee, nomination and remuneration committee and the risk management committee.

The risk management committee of the board will be chaired by an independent director and will be responsible for setting the ‘risk appetite’ of the bank based on its ‘risk capacity’.

Such a committee will need to ensure that the risk management functionaries should not be charged with overseeing activities for which they previously held any revenue generating responsibility or participated in business decision-making or approval process.

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