RBI Governor Shaktikanta Das has turned his focus on governance reforms in banks and non-banking entities, including the improvement of corporate governance among the boards of Public Sector Banks (PSBs).The central bank’s renewed thrust comes just weeks after the NDA government began its second term and it remains to be seen if Finance Minister Nirmala Sitharaman can succeed in putting an end to PSBs’ dual regulation.
Listing out a series of measures, Das noted that the Banks Board Bureau should be involved in succession planning and compensation practices of banks. “In order to improve the functioning of the PSB boards and to foster corporate governance, it is important to enhance their quality and stability through further streamlining appointment process, succession planning and compensation. These aspects could be evaluated by bank boards and reviewed by the Banks Board Bureau,” Das said in a public speech last week. He also underscored the need for creating a pool of independent directors across areas of expertise, besides the need for monitoring the performance of MDs and CEOs of both public and private banks by respective boards either through a sub-committee or through an external peer group review.
“An effective performance evaluation system should also be put in place for banks to improve their financial and operating parameters. The Government, the Banks Board Bureau and the Reserve Bank are engaged in developing an objective framework for performance evaluation of PSBs. This should redefine the contours of corporate governance in PSBs with a focus on transparency, accountability and efficiency,” he explained.
Meanwhile, touching up on governance issues in private banks, he said, concerns relate to incentive structure of their managements, quality of audits and compliance and efficient functioning of audit and risk management committees. “The Reserve Bank has issued a discussion paper on proposed guidelines for compensation in private sector banks which includes specification of minimum variable pay component and clawback arrangements, among others. The Reserve Bank will continue to play a positive and constructive role to ensure private sector banks flourish in their operations,” he added.
Stating that banks need to adequately strengthen their corporate governance structures besides making them sufficiently independent, Das said that banks should review their compliance function comprehensively to ensure compliance to all statutory and regulatory prescriptions in addition to their own internal guidelines, directions of the Board and their Committees and audit assessments.