Reforming private sector banks

Introduction:

The recent banking scams have underlined the issues of propriety and governance. What started off as a problem with PSBs has come a full circle with the focus now shifted to private banks (ICICI case). Any kind of financial crisis offers an opportunity for introspection where rules can be reformulated to bring them in sync with the new order. It is necessary to continuously revisit systems, laws and practices and bring them up to date.

 

Concerns:

  • The banking scams have brought to focus not just the lack of transparency in the functioning of banks but also that of audit and inspection practices.
  • Also, the allocation of responsibility for identifying and ensuring remedial action is not clear and needs to be delineated now.

Clear lines of thought need to be put down and the new rules should be formulated so that there is less ambiguity in future.

 

Banks’ perspective

  • First, in a private bank who is to uphold the moral responsibilty- the CEO, or executive Board members or the non-executive Board members?
    Whenever there is a conflict of interest, it has to be clear as to which executives are to be held accountable.
    If it is the CEO who is accountable, then does that imply that none of his relatives can have any credit dealings with the concerned bank. This seems unreasonable.
    Way out:
    One way to get around the above problem would be to disclose the financial dealings of the relatives, if any, in the Annual Report or the bank’s web site.By making such disclosures upfront, the bank can ensure that no questions are raised in future.
    Hence greater transparency is the key to avoiding such ‘conflict of interest’ issues.
  • The performance of bankers has come under the lens. Can the central bank or the government have a say in the salary package of a private company? The answer is probably ‘no’ because in the private sector Boards take a call on this issue.
    This should be debated and the rules must be clearly laid out.
  • The tenure of the CEO is always open to debate. Allowing anyone to carry on for more than a term of say five years is a call taken by shareholders or Boards.
    But allowing such extensions also lead to creation of power centres affecting the grooming of second rung leaders.
    Ironically in PSBs, CEOs have short terms as they get their positions closer to retirement while in private banks they begin their tenures at an early age – and can often get a stint of more than a decade before they retire.

 

Regulator’s perspective

From the regulator’s side, the issues that need to be addressed are:

  • The responsibility of the Boards should be clear on issues of governance and any deviance from regulation or conflict of interest should be discussed at this level.
  • The presence of a nominee director of the regulator on the Board, though controversial, is justified as he is the ‘ear of the public’ and ensures that all compliances are in order.
  • When audit reports are carried out on banks, the lacunae or important findings should be made public so that everyone is aware of them. It can be put up on the web site of the regulator or the concerned bank.
  • As a practice of good governance, the regulators too should disclose on their web sites the names of the relatives of the senior officials who are employed with the regulated entities. This will add to transparency in operations of the system.

 

 

 

Source:iasbaba

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