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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Economy