Corporate Governance in Banks

CORPORATE GOVERNANCE IN BANKS

K. C. COLLEGE Page 1

I. EXECUTIVE SUMMARY

Corporate governance mechanisms differ as between banks. The

governance mechanism of each bank is shaped by its political,

economic and social history as also by its legal framework. Despite

the differences in shareholder philosophies across all banks, good

governance mechanisms need to be encouraged among all

corporate and non-corporate entities.

Key elements of good corporate governance principles include

honesty, trust and integrity, openness, performance orientation,

responsibility and accountability, mutual respect, and commitment to

the organization.

Both government and RBI need to bring about significant changes in

the corporate governance mechanism adopted by banks and other

financial intermediaries. As a matter of principle, RBI should not

appoint its nominees on the boards of banks to avoid conflict of

interests. Although it is not feasible to have a free market for take-

over in respect banks there is a strong case for recognizing the

rights of the shareholders, especially of public sector banks and

financial institutions. Today the common shareholders are denied

such basic rights as adopting annual accounts or approving

dividends. They cannot also influence composition of the boards in

any way.

As a part of strengthening the functioning of their boards, banks

should appoint a risk management committee of the board in

addition to the three other board committees viz. audit, remuneration



and appointment committees. Since banks and institutions are

highly leveraged entities their failure would pose large risks to the

entire economic system. Their corporate governance mechanisms

should, therefore, be relatively much tighter.

Banks should have clear strategies for guiding their operations and

establishing accountability for executing them. Banks also maintain

high degree of transparency in regard to disclosure of information.

Of importance principles of corporate governance is how directors

and management develop a model of governance that aligns the

values of the corporate participants and then evaluate this model

periodically for its effectiveness. In particular, senior executives

should conduct themselves honestly and ethically, especially

concerning actual or apparent conflicts of interest, and disclosure in

financial reports. This all principles of corporate governance are

explained in this project.

Parties involved in corporate governance include the regulatory

body (e.g. the Chief Executive Officer, the board of directors,

management and shareholders). Other stakeholders who take part

include suppliers, employees, creditors, customers and the

community at large.



Impact has in corporate governance and its mechanisms and

controls are explained below.

In mechanisms and controls: - internal corporate governance

controls monitor activities and then take corrective action to

accomplish organisational goals and External corporate governance

controls encompass the controls external stakeholders exercise

over the organisation.

For the co-operative banks in India these are challenging times are

explained in this. The purpose and objectives of co-operatives

provide the framework for co-operative corporate governance.

Roles and measure taken by regularity bodies towards corporate

governance are also explained.

Indian scenario in corporate governance how they do and how they

are ranks to their services offered are explained in this project.

One case study or live example is taken of ALLAHABAD BANK how

they performed in corporate governance in detailed is explained in

this project.

Moreover, it has guided me to understand this corporate

governance in banks and also increase my knowledge to such

extent. I hope it will prove beneficial to me in developing my further

career.



II. INTRODUCTION & DEFINITION

Corporate governance is the set of processes, customs, policies, laws

and institutions affecting the way a corporation is directed, administered

or controlled. Corporate governance also includes the relationships

among the many shareholders involved and the goals for which the

corporation is governed. The principal stakeholders are the

shareholders, management and the board of directors. Other

stakeholders include employees, suppliers, customers, banks and other

lenders, regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important theme of

corporate governance is to ensure the accountability of certain

individuals in an organization through mechanisms that try to reduce or

eliminate the principal-agent problem. With a strong emphasis on

shareholders welfare, a related but separate thread of discussions

focuses on the impact of a corporate governance system in economic

efficiency. There are yet other aspects to the corporate governance

subject, such as the stakeholder view and the corporate governance

models around the world

―CORPORATE GOVERNANCE is the system by which companies are

directed and controlled by the management in the best interest of the

shareholders and others ensuring greater transparency and better and

timely financial reporting. The Board of Directors are responsible for

governance of their companies.‖

―CORPORATE GOVERNANCE is needed to create a corporate culture

of consciousness, transparency and openness. It refers to combination

of laws, rules, regulations, procedures and voluntary practices to enable



the companies to maximize the shareholders long-term value. It should

lead to increasing customer satisfaction, shareholder value and wealth.‖

―Enough law exists, but corporate governance is considered as one of

the important instrument for investor‘s protection and was rated high in

the priority on the SEBI‘s agenda for investor‘s protection.‖

The basic objective of Corporate Governance would be "enhancement of

the long-term shareholders value while at the same time protecting the

interests of other stakeholders."

3 key constituents of Corporate Governance are:

Shareholders Board of Directors Management

Steps taken by SEBI for strengthening corporate governance through

the amendment of the listing agreement are:

Strengthening of disclosure norms for IPOs

Providing information in directors‘ report for utilization and variation of

funds of the company including the cash flow and fund flow statements

in the annual reports.

Declaration of unaudited quarterly results;

Mandatory appointment of compliance officer for monitoring the share

transfer process and ensuring compliance with various rules,

regulations;

Timely disclosure of material and price sensitive information including

details of all material events having a bearing on the performance of the

company;

Dispatch of one copy of complete balance sheet to every household and

abridged balance sheet to all shareholders.



Issue of guidelines for preferential allotment of shares at market related

prices and

Issue of rules and regulations to ensure a fair and transparent

framework for takeovers and substantial acquisition of shares

In A Board Culture of Corporate Governance business author

Gabrielle O'Donovan defines corporate governance as 'an internal

system encompassing policies, processes and people, which serves the

needs of shareholders and other stakeholders, by directing and

controlling management activities with good business savvy, objectivity

and integrity. Sound corporate governance is reliant on external

marketplace commitment and legislation, plus a healthy board culture

which safeguards policies and processes'.

O'Donovan goes on to say that 'the perceived quality of a company's

corporate governance can influence its share price as well as the cost of

raising capital. Quality is determined by the financial markets, legislation

and other external market forces plus the international organisational

environment; how policies and processes are implemented and how

people are led. External forces are, to a large extent, outside the circle of

control of any board. The internal environment is quite a different matter,

and offers companies the opportunity to differentiate from competitors

through their board culture. To date, too much of corporate governance

debate has centered on legislative policy, to deter fraudulent activities

and transparency policy which misleads executives to treat the

symptoms and not the cause.'

It is a system of structuring, operating and controlling a company with a

view to achieve long term strategic goals to satisfy shareholders,

creditors, employees, customers and suppliers, and complying with the



legal and regulatory requirements, apart from meeting environmental

and local community needs.

Report of SEBI committee (India) on Corporate Governance defines

corporate governance as the acceptance by management of the

inalienable rights of shareholders as the true owners of the corporation

and of their own role as trustees on behalf of the shareholders. It is

about commitment to values, about ethical business conduct and about

making a distinction between personal & corporate funds in the

management of a company.‖

The definition is drawn from the Gandhian principle of trusteeship and

the Directive Principles of the Indian Constitution. Corporate Governance

is viewed as ethics and a moral duty.



III. HISTORY

In the 19th century, state corporation laws enhanced the rights of

corporate boards to govern without unanimous consent of shareholders

in exchange for statutory benefits like appraisal rights, to make corporate

governance more efficient. Since that time, and because most large

publicly traded corporations in the US are incorporated under corporate

administration friendly Delaware law, and because the US's wealth has

been increasingly securitized into various corporate entities and

institutions, the rights of individual owners and shareholders have

become increasingly derivative and dissipated. The concerns of

shareholders over administration pay and stock losses periodically has

led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash

of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and

Gardiner C. Means pondered on the changing role of the modern

corporation in society. Berle and Means' monograph "The Modern

Corporation and Private Property" (1932, Macmillan) continues to have a

profound influence on the conception of corporate governance in

scholarly debates today.

Since the late 1970‘s, corporate governance has been the subject of

significant debate in the U.S. and around the globe. Bold, broad efforts

to reform corporate governance have been driven, in part, by the needs

and desires of shareowners to exercise their rights of corporate

ownership and to increase the value of their shares and, therefore,

wealth. Over the past three decades, corporate directors‘ duties have

expanded greatly beyond their traditional legal responsibility of duty of

loyalty to the corporation and its shareowners.



In the first half of the 1990s, the issue of corporate governance in the

U.S. received considerable press attention due to the wave of CEO

dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. CALPERS led

a wave of institutional shareholder activism (something only very rarely

seen before), as a way of ensuring that corporate value would not be

destroyed by the now traditionally cozy relationships between the CEO

and the board of directors (e.g., by the unrestrained issuance of stock

options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand,

Indonesia, South Korea, Malaysia and The Philippines severely affected

by the exit of foreign capital after property assets collapsed. The lack of

corporate governance mechanisms in these countries highlighted the

weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance)

of Enron and Worldcom, as well as lesser corporate debacles, such as

Adelphia Communications, AOL, Arthur Andersen, Global Crossing,

Tyco, and, more recently, Fannie Mae and Freddie Mac, led to increased

shareholder and governmental interest in corporate governance. This

culminated in the passage of the Sarbanes-Oxley Act of 2002. But, since

then, the stock market has greatly recovered, and shareholder zeal has

waned accordingly.



IV. PRINCIPLES OF CORPORATES GOVERNANCE

Key elements of good corporate governance principles include honesty,

trust and integrity, openness, performance orientation, responsibility and

accountability, mutual respect, and commitment to the organization.

Of importance is how directors and management develop a model of

governance that aligns the values of the corporate participants and then

evaluate this model periodically for its effectiveness. In particular, senior

executives should conduct themselves honestly and ethically, especially

concerning actual or apparent conflicts of interest, and disclosure in

financial reports.

Commonly accepted principles of corporate governance include:

Rights and equitable treatment of shareholders: Organizations

should respect the rights of shareholders and help shareholders to

exercise those rights. They can help shareholders exercise their rights

by effectively communicating information that is understandable and

accessible and encouraging shareholders to participate in general

meetings.

Interests of other stakeholders: Organizations should recognize that

they have legal and other obligations to all legitimate stakeholders.

Role and responsibilities of the board: The board needs a range of

skills and understanding to be able to deal with various business issues

and have the ability to review and challenge management

performance. It needs to be of sufficient size and have an appropriate

level of commitment to fulfill its responsibilities and duties. There are

issues about the appropriate mix of executive and non-executive



directors. The key roles of chairperson and CEO should not be held by

the same person.

Integrity and ethical behaviour: Ethical and responsible decision

making is not only important for public relations, but it is also a

necessary element in risk management and avoiding lawsuits.

Organizations should develop a code of conduct for their directors and

executives that promotes ethical and responsible decision making. It is

important to understand, though, that reliance by a company on the

integrity and ethics of individuals is bound to eventual failure. Because

of this, many organizations establish Compliance and Ethics Programs

to minimize the risk that the firm steps outside of ethical and legal

boundaries.

Disclosure and transparency: Organizations should clarify and make

publicly known the roles and responsibilities of board and management

to provide shareholders with a level of accountability. They should also

implement procedures to independently verify and safeguard the

integrity of the company's financial reporting. Disclosure of material

matters concerning the organization should be timely and balanced to

ensure that all investors have access to clear, factual information.

Issues involving corporate governance principles include:

internal controls and the independence of the entity's auditors

oversight and management of risk

oversight of the preparation of the entity's financial statements

review of the compensation arrangements for the chief executive

officer and other senior executives



the resources made available to directors in carrying out their duties

the way in which individuals are nominated for positions on the

board

dividend policy

―Corporate Governance" despite some feeble attempts from various

quarters has remained ambiguous and often misunderstood phrase.

For Quite some time it was confined to only corporate management. It

is not so. It is something much broader for it must include a fair,

efficient and transparent administration to meet certain well defined

objectives. Corporate governance also must go beyond law. The

quantity, quality and frequency of financial and managerial disclosure,

the degree and extent to which the board of Director (BOD) exercise

their trustee responsibilities and the commitment to run transparent

organization- these should evolve due to interplay of many factors and

the role played by more progressive elements within the corporate

sector. In India, a strident demand for evolving a code of good

practices by the corporate themselves is emerging.



V. ROLE OF INSTITUTIONAL INVESTOR:-

Many years ago, worldwide, buyers and sellers of corporation stocks

were individual investors, such as wealthy businessmen or families, who

often had a vested, personal and emotional interest in the corporations

whose shares they owned. Over time, markets have become largely

institutionalized: buyers and sellers are largely institutions (e.g., pension

funds, insurance companies, mutual funds, hedge funds, investor

groups, and banks).

The rise of the institutional investor has brought with it some increase of

professional diligence which has tended to improve regulation of the

stock market (but not necessarily in the interest of the small investor or

even of the naïve institutions, of which there are many). Note that this

process occurred simultaneously with the direct growth of individuals

investing indirectly in the market (for example individuals have twice as

much money in mutual funds as they do in bank accounts). In mutual

funds, however this growth occurred primarily by way of individuals

turning over their funds to 'professionals' to manage. In this way, the

majority of investment now is described as "institutional investment"

even though the vast majority of the funds are for the benefit of

individual investors.

Program trading, the hallmark of institutional trading, is averaging over

60% a day in 2007.

Unfortunately, there has been a concurrent lapse in the oversight of

large corporations, which are now almost all owned by large institutions.

The Board of Directors of large corporations used to be chosen by the

principal shareholders, who usually had an emotional as well as

monetary investment in the company (think Ford), and the Board

diligently kept an eye on the company and its principal executives (they

usually hired and fired the President, or Chief executive officer— CEO).

Nowadays, if the owning institutions don't like what the President/CEO is

doing and they feel that firing them will likely be costly (think "golden

handshake") and/or time consuming, they will simply sell out their

interest. The Board is now mostly chosen by the President/CEO, and

may be made up primarily of their friends and associates, such as

officers of the corporation or business colleagues. Since the



(institutional) shareholders rarely object, the President/CEO generally

takes the Chair of the Board position for his/herself (which makes it

much more difficult for the institutional owners to "fire" him/her).

Occasionally, but rarely, institutional investors support shareholder

resolutions on such matters as executive pay and anti-takeover

measures.

Finally, the largest pools of invested money (such as the mutual fund

'Vanguard 500', or the largest investment management firm for

corporations, State Street Corp.) are designed simply to invest in a very

large number of different companies with sufficient liquidity, based on

the idea that this strategy will largely eliminate individual company

financial or other risk and, therefore, these investors have even less

interest in a particular company's governance.

Since the marked rise in the use of Internet transactions from the 1990s,

both individual and professional stock investors around the world have

emerged as a potential new kind of major (short term) force in the direct

or indirect ownership of corporations and in the markets: the casual

participant. Even as the purchase of individual shares in any one

corporation by individual investors diminishes, the sale of derivatives

(e.g., exchange-traded funds (ETFs), Stock market index options, etc.)

has soared. So, the interests of most investors are now increasingly

rarely tied to the fortunes of individual corporations.

But, the ownership of stocks in markets around the world varies; for

example, the majority of the shares in the Japanese market are held by

financial companies and industrial corporations (there is a large and

deliberate amount of cross-holding among Japanese keiretsu

corporations and within S. Korean chaebol 'groups'), whereas stock in

the USA or the UK and Europe are much more broadly owned, often still

by large individual investors.



VI. PARTIES TO CORPORATES GOVERNANCE

Parties involved in corporate governance include the regulatory body

(e.g. the Chief Executive Officer, the board of directors, management

and shareholders). Other stakeholders who take part include suppliers,

employees, creditors, customers and the community at large.

In corporations, the shareholder delegates decision rights to the

manager to act in the principal's best interests. This separation of

ownership from control implies a loss of effective control by shareholders

over managerial decisions. Partly as a result of this separation between

the two parties, a system of corporate governance controls is

implemented to assist in aligning the incentives of managers with those

of shareholders. With the significant increase in equity holdings of

investors, there has been an opportunity for a reversal of the separation

of ownership and control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is

their responsibility to endorse the organisation's strategy, develop

directional policy, appoint, supervise and remunerate senior executives

and to ensure accountability of the organisation to its owners and

authorities.

The Company Secretary, known as a Corporate Secretary in the US and

often referred to as a Chartered Secretary if qualified by the Institute of

Chartered Secretaries and Administrators (ICSA), is a high ranking

professional who is trained to uphold the highest standards of corporate

governance, effective operations, compliance and administration.



All parties to corporate governance have an interest, whether direct or

indirect, in the effective performance of the organisation. Directors,

workers and management receive salaries, benefits and reputation,

while shareholders receive capital return. Customers receive goods and

services; suppliers receive compensation for their goods or services. In

return these individuals provide value in the form of natural, human,

social and other forms of capital.

A key factor in an individual's decision to participate in an organisation

e.g. through providing financial capital and trust that they will receive a

fair share of the organisational returns. If some parties are receiving

more than their fair return then participants may choose to not continue

participating leading to organizational collapse.

VII. IMPACT

The positive effect of good corporate governance on different

stakeholders ultimately is a strengthened economy, and hence good

corporate governance is a tool for socio-economic development. After

East Asian economies collapsed in the late 20th century, the World

Bank's president warned those countries, that for sustainable

development, corporate governance has to be good. Economic health of

a nation depends substantially on how sound and ethical businesses

are.



VIII. MECHANISMS AND CONTROLS

Corporate governance mechanisms and controls are designed to reduce

the inefficiencies that arise from moral hazard and adverse selection. For

example, to monitor managers' behaviour, an independent third party

(the auditor) attests the accuracy of information provided by

management to investors. An ideal control system should regulate both

motivation and ability.

A. INTERNAL CORPORATES GOVERNANCE CONTROLS:-

Internal corporate governance controls monitor activities and then

take corrective action to accomplish organisational goals. Examples

include:

Monitoring by the board of directors: The board of directors,

with its legal authority to hire, fire and compensate top

management, safeguards invested capital. Regular board

meetings allow potential problems to be identified, discussed

and avoided. Whilst non-executive directors are thought to be

more independent, they may not always result in more effective

corporate governance and may not increase performance.

Different board structures are optimal for different firms.

Moreover, the ability of the board to monitor the firm's

executives is a function of its access to information. Executive

directors possess superior knowledge of the decision-making

process and therefore evaluate top management on the basis of

the quality of its decisions that lead to financial performance

outcomes, ex ante. It could be argued, therefore, that executive

directors look beyond the financial criteria.



Remuneration:-Performance-based remuneration is designed to

relate some proportion of salary to individual performance. It

may be in the form of cash or non-cash payments such as

shares and share options, superannuation or other benefits.

Such incentive schemes, however, are reactive in the sense

that they provide no mechanism for preventing mistakes or

opportunistic behaviour, and can elicit myopic behaviour.

B. EXTERNAL CORPORATES GOVERNANCE CONTROLS

External corporate governance controls encompass the controls

external stakeholders exercise over the organisation. Examples

include:

competition

debt covenants

demand for and assessment of performance information

(especially financial statements)

government regulations

managerial labour market

media pressure

takeovers



IX. SYSTEMATIC PROBLEMS OF CORPORATES GOVERNANCE

Demand for information: A barrier to shareholders using good

information is the cost of processing it, especially to a small shareholder.

The traditional answer to this problem is the efficient market hypothesis

(in finance, the efficient market hypothesis (EMH) asserts that financial

markets are efficient), which suggests that the shareholder will free ride

on the judgments of larger professional investors.

Monitoring costs: In order to influence the directors, the

shareholders must combine with others to form a significant voting

group which can pose a real threat of carrying resolutions or

appointing directors at a general meeting.

Supply of accounting information: Financial accounts form a crucial

link in enabling providers of finance to monitor directors.

Imperfections in the financial reporting process will cause

imperfections in the effectiveness of corporate governance. This

should, ideally, be corrected by the working of the external auditing

process.



X. CORPORATE GOVERNANCE IN EMERGING MARKET BANKS

Contrary to popular belief, corporate governance (CG) does exist in

emerging markets. While it is true that the equivalent of the Sarbanes-

Oxley Act (SOX) is not being enforced on a wide scale in any emerging

market, notable improvements are being made, at least in the banks,

where development of good CG often runs in tandem with progress in

risk management controls and regulation. It is important to note, that,

while good governance in itself does not prevent fraud, it should make it

easier to detect.

CG requires a separation of function between the board, executive

management and audit, and implementation is key. The independence

and authority of each function needs to exist in more than only legal

form. Progress is seen in implementation in most emerging markets over

the past two years. However, economic conditions have been relatively

benign, and the robustness of new CG in practice will only be tested in a

downturn. Weak CG practices at any company are a negative rating

factor and may serve as a cap on how high a rating can go, however

strong its financial profile may seem.

The degree of governance in companies in a country goes hand-in-hand

with the level of political governance. The identification and separation of

powers and responsibilities between three branches of government

create the necessary framework for CG at the company level to function.

The degree of political governance will, to a great extent, be reflected in

the ability of a market economy and companies in it to develop. Before

assessing the degree of CG at an individual bank, it is important to

analyse the checks and balances that exist and those still under

development in the banking system in question.



Oversight of risk management by a bank regulator is highly influential in

a bank's governance structure. For CG to be effective, a banking system

requires the following:

• A functioning legal system;

• Independent regulators;

• Meaningful fines or sanctions and/or market forces that challenge and

punish banks that do not play by the rules.

At all three tiers of governance (political, banking system, bank), the

weaknesses that are most prevalent in emerging markets are:

• A high level of related party influence (a consequence of wealth

and power being concentrated in only a few hands);

• An absence of challenges to the status quo due to lack of

experience and expertise.

State ownership of the banks and/or direct influence on their operations

is a major issue that can taint governance at all levels.



XI. CORPORATE GOVERNANCE IN CO-OPERATIVE BANKS

For the co-operative banks in India these are challenging times. Never

before has the need for restoring customer confidence in the

cooperative sector been felt so much. Never before has the issue of

good governance in the co-operative banks assumed such criticality.

The literature on corporate governance in its wider connotation covers a

range of issues such as protection of shareholders‘ rights, enhancing

shareholders‘ value, Board issues including its composition and role,

disclosure requirements, integrity of accounting practices, the control

systems, in particular internal control systems. Corporate governance

especially in the co-operative sector has come into sharp focus because

more and more co-operative banks in India, both in urban and rural

areas, have experienced grave problems in recent times which have in

a way threatened the profile and identity of the entire co-operative

system. These problems include mismanagement, financial impropriety,

poor investment decisions and the growing distance between members

and their co-operative society.

The purpose and objectives of co-operatives provide the framework for

co-operative corporate governance. Co- operatives are organised

groups of people and jointly managed and democratically controlled

enterprises. They exist to serve their members and depositors and

produce benefits for them. Co-operative corporate governance is

therefore about ensuring co-operative relevance and performance by

connecting members, management and the employees to the policy,

strategy and decision-making processes.



XII. GENESIS OF CORPORATE GOVERNANCE:-

It will certainly not be out of place here to recount how issues relating to

corporate governance and corporate control have come to the fore the

world over in the recent past. The seeds of modern corporate

governance were probably sown by the Watergate scandal in the USA.

Subsequent investigations by US regulatory and legislative bodies

highlighted control failures that had allowed several major corporations

to make illegal political contributions and bribe government officials.

While these developments in the US stimulated debate in the UK, a

spate of scandals and collapses in that country in the late 1980s and

early 1990s led shareholders and banks to worry about their

investments. Several companies in UK which saw explosive growth in

earnings in the ‘80s ended the decade in a memorably disastrous

manner. Importantly, such spectacular corporate failures arose primarily

out of poorly managed business practices.

This debate was driven partly by the subsequent enquiries into

corporate governance (most notably the Cadbury Report) and partly by

extensive changes in corporate structure. In May 1991, the London

Stock Exchange set up a Committee under the chairmanship of Sir

Arian Cadbury to help raise the standards of corporate governance and

the level of confidence in financial reporting and auditing by setting out

clearly what it sees as the respective responsibilities of those involved

and what it believes is expected of them. The Committee investigated

accountability of the Board of Directors to shareholders and to the

society. It submitted its report and the associated ‗code of best

practices‘ in December 1992 wherein it spelt out the methods of

governance needed to achieve a balance between the essential powers

of the Board of Directors and their proper accountability. Being a

pioneering report on corporate governance, it would perhaps be in order

to make a brief reference to its recommendations which are in the

nature of guidelines relating to, among other things, the Board of

Directors and Reporting & Control.



The Cadbury Report stipulated that the Board of Directors should meet

regularly, retain full and effective control over the company and monitor

the executive management. There should be a clearly accepted division

of responsibilities at the head of the company which will ensure balance

of power and authority so that no individual has unfettered powers of

decision. The Board should have a formal schedule of matters

specifically reserved to it for decisions to ensure that the direction and

control of the company is firmly in its hands. There should also be an

agreed procedure for Directors in the furtherance of their duties to take

independent professional advice.

The Cadbury Report generated a lot of interest in India. The issue of

corporate governance was studied in depth and dealt with by the

Confederation of Indian Industries (CII), Associated Chamber of

Commerce and Industry (ASSOCHAM) and Securities and Exchange

Board of India (SEBI). These studies reinforced the Cadbury Report‘s

focus on the crucial role of the Board and the need for it to observe a

Code of Best Practices. Co-operative banks as corporate entities

possess certain unique characteristics. Paradoxical as it may sound,

evolution of co-operatives in India as peoples‘ organisations rather than

business enterprises adopting professional managerial systems has

hindered growth of professionalism in co-operatives and proved to be a

neglected area in their evolution.



XIII. ROLE OF THE GOVERNMENT AND THE REGULATOR

Regulators are external pressure points for good corporate governance.

Mere compliance with regulatory requirements is not however an ideal

situation in itself. In fact, mere compliance with regulatory pressures is a

minimum requirement of good corporate governance and what are

required are internal pressures, peer pressures and market pressures to

reach higher than minimum standards prescribed by regulatory

agencies. RBI‘s approach to regulation in recent times has some

features that would enhance the need for and usefulness of good

corporate governance in the co-operative sector. The transparency

aspect has been emphasized by expanding the coverage of information

and timeliness of such information and analytical content. Importantly,

deregulation and operational freedom must go hand in hand with

operational transparency. In fact, the RBI has made it clear that with the

abolition of minimum lending rates for co-operative banks, it will be

incumbent on these banks to make the interest rates charged by them

transparent and known to all customers. Banks have therefore been

asked to publish the minimum and maximum interest rates charged by

them and display this information in every branch. Disclosure and

transparency are thus key pillars of a corporate governance framework

because they provide all the stakeholders with the information

necessary to judge whether their interests are being taken care of. We

in RBI see transparency and disclosure as an important adjunct to the

supervisory process as they facilitate market discipline of banks.

Another area which requires focused attention is greater transparency in

the balance sheets of co-operative banks. The commercial banks in

India are now required to disclose accounting ratios relating to operating

profit, return on assets, business per employee, NPAs, etc. as also



maturity profile of loans, advances, investments, borrowings and

deposits. The issue before us now is how to adapt similar disclosures

suitably to be captured in the audit reports of co-operative banks. RBI

had advised Registrars of Co-operative Societies of the State

Governments in 1996 that the balance sheet and profit & loss account

should be prepared based on prudential norms introduced as a sequel to

Financial Sector Reforms and that the statutory/departmental auditors of

co-operative banks should look into the compliance with these norms.

Auditors are therefore expected to be well-versed with all aspects of the

new guidelines issued by RBI and ensure that the profit & loss account

and balance sheet of cooperative banks are prepared in a transparent

manner and reflect the true state of affairs. Auditors should also ensure

that other necessary statutory provisions and appropriations out of

profits are made as required in terms of Co-operative Societies Act /

Rules of the state concerned and the bye-laws of the respective

institutions.



XIV. BOARD OF DIRECTORS AND THEIR COMMITTEES

At the initiative of the RBI, a consultative group, aimed at strengthening

corporate governance in banks, headed by Dr. Ashok Ganguli was set

up to review the supervisory role of Board of banks. The

recommendations include the role and responsibility of independent

non-executive directors, qualification and other eligibility criteria for

appointment of non-executive directors, training the directors and

keeping them current with the latest developments. Private sector

banks, etc. it is unanimously accepted that the most crucial aspect of

corporate governance is that the organisation have a professional board

which can drive the organisation through its ability to perform its

responsibility of meeting regularly, retaining full and effective control

over the company and monitor the executive management. Some of the

important recommendations on the constitution of the Board are:

Qualification and other eligibility criteria for appointment of non-

executive directors,

Defining role and responsibilities of directors including the

recommended ―Deed of Covenant‖ to be executed by the bank and

the directors in conduct of the board functions.

Training the directors and keeping them abreast of the latest

developments.



XV. MEASURES TAKEN BY BANKS TOWARDS IMPLEMENTATION OF BEST PRACTICES

Prudential norms in terms of income recognition, asset classification,

and capital adequacy have been well assimilated by the Indian banking

system. In keeping with the international best practice, starting 31st

March 2004, banks have adopted 90 days norm for classification of

NPAs. Also, norms governing provisioning requirements in respect of

doubtful assets have been made more stringent in a phased manner.

Beginning 2005, banks will be required to set aside capital charge for

market risk on their trading portfolio of government investments, which

was earlier virtually exempt from market risk requirement.

Capital Adequacy: All the Indian banks barring one today are well

above the stipulated benchmark of 9 per cent and remain in a state of

preparedness to achieve the best standards of CRAR as soon as the

new Basel 2 norms are made operational. In fact, as of 31st March 2004,

banking system as a whole had a CRAR close to 13 per cent.

On the Income Recognition Front, there is complete uniformity now in

the banking industry and the system therefore ensures responsibility

and accountability on the part of the management in proper accounting

of income as well as loan impairment.

ALM and Risk Management Practices – At the initiative of the

regulators, banks were quickly required to address the need for Asset

Liability Management followed by risk management practices. Both

these are critical areas for an effective oversight by the Board and the

senior management which are implemented by the Indian banking

system on a tight time frame and the implementation review by RBI.

These steps have enabled banks to understand measure and anticipate



the impact of the interest rate risk and liquidity risk, which in deregulated

environment is gaining importance.

XVI. MEASURES TAKEN BY RE G U L AT O R TOWARDS CORPORATE GOVERNANCE

Reserve Bank of India has taken various steps furthering corporate

governance in the Indian Banking System. These can broadly be

classified into the following three categories:

A. Transparency

B. Off-site surveillance

C. Prompt corrective action Transparency and

D. disclosure standards

Transparency and accounting standards in India have been enhanced

to align with international best practices. However, there are many gaps

in the disclosures in India vis-à-vis the international standards,

particularly in the area of risk management strategies and risk

parameters, risk concentrations, performance measures, component of

capital structure, etc. Hence, the disclosure standards need to be further

broad-based in consonance with improvements in the capability of

market players to analyse the information objectively.

The off-site surveillance mechanism is also active in monitoring the

movement of assets, its impact on capital adequacy and overall

efficiency and adequacy of managerial practices in banks. RBI also

brings out the periodic data on ―Peer Group Comparison‖ on critical

ratios to maintain peer pressure for better performance and governance.

Prompt corrective action has been adopted by RBI as a part of core

principles for effective banking supervision. As against a single trigger



point based on capita adequacy normally adopted by many countries,

Reserve Bank in keeping with Indian conditions have set two more

trigger points namely Non-Performing Assets (NPA) and Return on

Assets (ROA) as proxies for asset quality and profitability. These trigger

points will enable the intervention of regulator through a set of

mandatory action to stem further deterioration in the health of banks

showing signs of weakness.



XVII. THE INDIAN SCENARIO

CG among Indian banks is discussed across three broad categories -

the state-owned banks, the "new" private sector banks (i.e. those that

were given a banking licence in 1993), and the "old" private sector

banks. At the risk of over simplifying, Fitch has drawn conclusions

regarding banks in each of these groups, although standards of

individual banks might be better or lower than the "median" governance

practices discussed.

There are 27 state-owned banks in India, accounting for 75% of

banking-system assets. Government ownership varies from 51%-100%.

The state-owned banks are governed by the Banking (Acquisition and

Transfer of Undertakings) Act, which gives sweeping powers to the

government. These banks have begun to list their equity on the domestic

bourses, and have needed to comply with disclosure and good CG

guidelines stipulated by the stock exchanges, which focus on the rights

of minority shareholders. It is worth mentioning that boards, including

executive chairmen and "independent" directors, are still determined by

the government; and power is concentrated with the executive chairman,

who is generally appointed on account of seniority.

The signs are that intervention by the state in state-owned banks' credit

operations is declining. Direct intervention in decisions is being replaced

by "policy directed" lending aimed at achieving the broader social

objectives of the government in power. Increasingly decisions are based

on commercial considerations, partly stemming from the bank's public

listings and partly because of more investment in technology that brings

greater transparency and is helping to standardize decision making.

Foreign ownership of some shares in some banks and frequent

interaction with large institutional investors has maintained pressure on



these banks to adopt more progressive CG standards. Summing up,

although there has been an improvement in the governance practices of

these banks, the ownership overhang still remains, and they still comply

more with the letter of governance practices than the spirit.

In India, CG standards are the highest among new private sector banks.

Two of these, HDFC Bank (rated on Fitch's national scale for India at

‗AAA(ind)', with an individual rating of 'C') and ICICI Bank (IDR 'BB+' on

Fitch's international scale and also with an individual rating of 'C'), are

listed on the New York Stock Exchange, and UTI Bank (rated 'AA+(ind)'

and 'C/D') is listed on the London Stock Exchange. These banks adhere

to the governance practices and disclosures expected by international

investors. The boards of these banks are reasonably broad based, with

independent directors of wide-ranging experience.

Anecdotally, the various board committees (compliance, audit, risk,

compensation) are vocal, particularly in the internationally listed banks.

All this has had a knock-on effect on the other domestic banks. In sharp

contrast, the old private sector banks have the weakest level of

governance. These banks are controlled by a few families or by

communities, with non-bank interests. While these banks might have

outside directors and various board committees, these tend to be

passive with real decision-making concentrated with the large

shareholders - increasing the chance of related party lending.

The Reserve Bank (RBI), India's central bank, is focused on governance

issues both from the perspective of improving the quality of its oversight

and from securing the interests of depositors through transparency, off-

site surveillance and prompt corrective action. The RBI has established

two major committees to look into governance at the banks and



benchmark international best practices of implementation. These

committees have made recommendations directed at the independence

and autonomy of the board and focused on harmonizing the

OECD/Basel/SOX recommendations with local regulations and practices

followed in the domestic Indian market.

The Individual ratings of banks in India generally correspond to Fitch's

views on CG, although they incorporate all of the other factors that

influence a bank's financial position as well. New private sector banks

typically have relatively high individual ratings for the region ('C'), and

those of the old private sector banks are at the lowest end of the scale

('D/E', 'E'). For the state owned banks, individual ratings are typically

between the two at 'C/D', 'D'.

One feature about financial reporting in the Indian banking system worth

mentioning is that some of the large state-owned banks have a number

of different auditors. This is a concern, given what Fitch has seen in the

international market place - i.e. reliance on staff from other audit firms to

complete an audit for large international groups has resulted in errors

going unnoticed. This is a resource issue in the audit firms, given the

scale of the large state-owned banks' operations.

For example, State Bank of India has 9,000 branches, Punjab National

Bank has over 5000, and Bank of Maharashtra, although smaller, still

has over 1,000 branches. In addition to the geographical spread, the

regulatory requirement for results to be audited within three months of

the year end also means that several firms have to be hired to ensure

that the audits are completed.

Typically, these audit firms form a "central committee" that looks at the

audit reports that come in from the branches and the regions and then



discusses these jointly with the chief financial officer of the bank. As

these banks appoint auditors for only a three-year period, it has not been

feasible for one audit firm to build the necessary infrastructure in terms

of people and offices to audit these banks on its own.



XVIII. CASE STUDY ALLAHABAD BANK

1) OVERVIEW

The Oldest Joint Stock Bank of the Country, Allahabad Bank

was founded on April 24, 1865 by a group of Europeans at

Allahabad. At that juncture Organized Industry, Trade and

Banking started taking shape in India. Thus, the History of the

Bank spread over three Centuries - Nineteenth, Twentieth and

Twenty-First.

2) CODE OF CONDUCT

i. Need and objective of the Code- Clause 49 of the Listing

agreement entered into with the Stock Exchanges,

requires, as part of Corporate Governance the listed

entities to lay down a Code of Conduct for Directors on

the Board of an entity and its Senior Management. The

term "Senior Management" shall mean personnel of the

company who are members of its core management team

excluding the Board of Directors. This would also include

all members of management, one level below the

Executive Directors including all functional heads.

ii. Bank's Belief System - This Code of Conduct attempts to

set forth the guiding principles on which the Bank shall

operate and conduct its daily business with its

multitudinous stakeholders, government and regulatory

agencies, media and anyone else with whom it is

connected. It recognizes that the Bank is a trustee and

custodian of public money and in order to fulfill fiduciary

obligations and responsibilities, it has to maintain and



continue to enjoy the trust and confidence of public at

large. The Bank acknowledges the need to uphold the

integrity of every transaction it enters into and believes

that honesty and integrity in its internal conduct would be

judged by its external behavior. The bank shall be

committed in all its actions to the interest of the countries

in which it operates. The Bank is conscious of the

reputation it carries amongst its customers and public at

large and shall endeavor to do all it can to sustain and

improve upon the same in its discharge of obligations.

The Bank shall continue to initiate policies, which are

customer centric and which promote financial prudence.

iii. Philosophy of the Code-

The code envisages and expects-

a. Adherence to the highest standards of honest and

ethical conduct, including proper and ethical procedures in

dealing with actual or apparent conflicts of interest

between personal and professional relationships.

b. Full, fair, accurate, sensible, timely and meaningful

disclosures in the periodic reports required to be filed by

the Bank with government and regulatory agencies.

c. Compliance with applicable laws, rules and regulations.

d. To address misuse or misapplication of the Bank's

assets and resources.

e. The highest level of confidentiality and fair dealing

within and outside the Bank.



3) General Standards of conduct

The Bank expects all Directors and members of the Core

Management to exercise good judgements, to ensure the

interests, safety and welfare of customers, employees and other

stakeholders and to maintain a cooperative, efficient, positive,

harmonious and productive work environment and business

organization. The Directors and members of the Core

Management while discharging duties of their office must act

honestly and with due diligence. They are expected to act with

that amount of utmost care and prudence, which an ordinary

person is expected to take in his/ her own business. These

standards need to be applied while working in the premises of

the Bank, at offsite locations where business is being conducted

whether in India or abroad, at Bank-sponsored business and

social events, or at any other place where they act as

representatives of the Bank.

4) Conflict of Interest

A "conflict of interest" occurs when personal interest of any

member of the Board of Directors and of the Core management

interferes or appears to interfere in any way with the interests of

the Bank. Every member of the Board of Directors and Core

Management has a responsibility to the Bank, its stakeholders

and to each other. Although this duty does not prevent them

from engaging in personal transactions and investments, it does

demand that they avoid situations where a conflict of interest

might occur or appear to occur. They are expected to perform

their duties in a way that they do not conflict with the Bank's

interest such as:



Employment /Outside Employment - The members of the

Core Management are expected to devote their total

attention to the business interests of the Bank. They are

prohibited from engaging in any activity that interferes with

their performance or responsibilities to the Bank or otherwise

is in conflict with or prejudicial to the Bank.

Business Interests - If any member of the Board of

Directors and Core Management considers investment in

securities issued by the Bank's customer, supplier or

competitor, they should ensure that these investments do not

compromise their responsibilities to the Bank. Many factors

including the size and nature of the investment; their ability to

influence the Bank's decisions, their access to confidential

information of the Bank, or of the other entity, and the nature

of the relationship between the Bank and the customer,

supplier or competitor should be considered in determining

whether a conflict exists. Additionally, they should disclose to

the Bank any interest that they have which may conflict with

the business of the Bank.

Related Parties - As a general rule, the Directors and

members of the Core Management should avoid conducting

Bank‘s business with a relative or any other person or any

firm, Company, association in which the relative or other

person is associated in any significant role. Relatives shall

include :

• Father

• Mother (including step mother)



• Son's Wife

• Daughter (including step daughter)

• Father's father

• Father's mother

• Mother's mother

• Mother's father

• Son's son

• Son's son's wife

• Son's daughter

• Son's daughter's husband

• Daughter's husband

• Daughter's son

• Daughter's son's wife

• Daughter's daughter

• Daughter's daughter's husband

• Brother (including step brother)

• Brother's wife

• Sister (including step sister)

• Sister's husband

If such a related party Transaction is unavoidable, they must

fully disclose the nature of the related party transaction to the

appropriate authority. Any dealings with a related party must be

conducted in such a way that no preferential treatment is given

to that party.



In the case of any other transaction or situation giving rise to

conflicts of interests, the appropriate authority should after due

deliberations decide on its impact.

5) Applicable Laws

The Directors of the Bank and Core Management must comply

with applicable laws, regulations, rules and regulatory orders.

They should report any inadvertent non - compliance, if

detected subsequently, to the concerned authorities.

6) Disclosure Standards

The Bank shall make full, fair, accurate, timely and meaningful

disclosures in the periodic reports required to be filed with

Government and Regulatory agencies. The members of Core

Management of the bank shall initiate all actions deemed

necessary for proper dissemination of relevant information to

the Board of Directors, Auditors and other Statutory Agencies,

as may be required by applicable laws, rules and regulations.

7) Use of Bank's Assets and Resources

Each member of the Board of Directors and the Core

Management has a duty to the Bank to advance its legitimate

interests while dealing with the Bank's assets and resources.

Members of the Board of Directors and Core Management are

prohibited from:

Using Corporate property, information or position for

personal gain,

Soliciting, demanding, accepting or agreeing to accept

anything of value from any person while dealing with the

Bank's assets and resources,



Acting on behalf of the Bank in any transaction in which

they or any of their relative(s) have a significant direct or

indirect interest.

8) Confidentiality and Fair Dealings

i. Bank's confidential Information-

The Bank's confidential information is a valuable asset.

It includes all trade related information, trade secrets,

confidential and privileged information, customer

information, employee related information, strategies,

administration, research in connection with the Bank

and commercial, legal, scientific, technical data that are

either provided to or made available each member of

the Board of Directors and the core Management by

the Bank either in paper form or electronic media to

facilitate their work or that they are able to know or

obtain access by virtue of their position with the Bank.

All confidential information must be used for Bank's

business purposes only.

This information includes the safeguarding, securing

and proper disposal of confidential information in

accordance with the Bank's policy on maintaining and

managing records. The obligation extends to

confidential of third parties, which the Bank has

rightfully received under non-disclosure agreements.

To further the Bank's business, confidential information

may have to be disclosed to potential business

partners. Such disclosures should be made after



considering its potential benefits and risks. Care should

be taken to divulge the most sensitive information, only

after the said potential business partner has signed a

confidentiality agreement with the Bank.

Any publication or publicly made statement that might

be perceived or construed as attributable to the Bank,

made outside the scope of any appropriate authority in

the Bank, should include a disclaimer that the

publication or statement represents the views of the

specific author and not the Bank.

(ii) Other Confidential Information-

The bank has many kinds of business relationships with

many companies and individuals. Sometimes, they will

volunteer confidential information about their products or

business plans to induce the Bank to enter into a business

relationship. At other times, the Bank may request that a

third party provide confidential information to permit the Bank

to evaluate a potential business relationship with the party.

Therefore, special care must be taken by the Board of

Directors and members of the Core Management to handle

the confidential information of others responsibly. Such

confidential information should be handled in accordance

with the agreements with such third parties.



The Bank requires that every Director and the member

of Core Management, General Managers should be

fully compliant with the laws, statutes, rules and

regulations that have the objective of preventing

unlawful gains of any nature whatsoever.

Directors and members of Core Management shall not

accept any offer, payment, promise to pay or

authorization to pay any money, gift or anything of

value from customers, suppliers, shareholders/

stakeholders etc that is perceived as intended, directly

or indirectly, to influence any business decision, any

act or failure to act, any commission of fraud or

opportunity for the commission of any fraud.

Good Corporate Governance Practices

Each member of the Board of Directors and Core

Management of the Bank should adhere to the following so

as to ensure compliance with good Corporate Governance

practices.

i. Dos –

Attend Board meetings regularly and participate in the

deliberations and discussions effectively.

Study the Board papers thoroughly and enquire about

follow-up reports on definite time schedule.

Involve actively in the matter of formulation of general

policies.



Be familiar with the broad objectives of the Bank and

policies laid down by the Government and the various

laws and legislations.

Ensure confidentiality of the Bank's agenda papers,

notes and minutes.

ii. Don‘ts

Do not interfere in the day to day functioning of the

Bank.

Do not reveal any information relating to any

constituent of the Bank to anyone.

Do not display the logo / distinctive design of the Bank

on their personal visiting cards / letter heads.

Do not sponsor any proposal relating to loans,

investments, buildings or sites for Bank's premises,

enlistment or empanelment of contractors, architects,

auditors, doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and/ or be

subversive of maintenance of discipline, good conduct

and integrity of the staff.



o Waivers

Any waiver of any provision of this Code of Conduct for a

member of the Bank's Board of Directors or a member of the

Core Management must be approved in writing by the Board

of Directors of the Bank.

The matters covered in this Code of Conduct are of the

utmost importance to the bank, its stakeholders and its

business partners, and are essential to the Bank's ability to

conduct its business in accordance with its value system.



XIX. CONCLUSION

A Narrow Definition-Corporate governance can be defined as ―the

system for direction and control of the corporation.‖

- Sir Adrian Cadbury, The Report on the Financial Aspects of

Corporate Governance, 1992

In the years to come, the Indian financial system will grow not only in

size but also in complexity as the forces of competition gain further

momentum and financial markets acquire greater depth. I can assure

you that the policy environment will remain supportive of healthy growth

and development with accent on more operational flexibility as well as

greater prudential regulation and supervision. The real success of our

financial sector reforms will however depend primarily on the

organisational effectiveness of the banks, including cooperative banks,

for which initiatives will have to come from the banks themselves. It is

for the co-operative banks themselves to build on the synergy inherent

in the cooperative structure and stand up for their unique qualities. With

elements of good corporate governance, sound investment policy,

appropriate internal control systems, better credit risk management,

focus on newly-emerging business areas like micro finance,

commitment to better customer service, adequate automation and

proactive policies on house-keeping issues, co-operative banks will

definitely be able to grapple with these challenges and convert them into

opportunities.



Why care about corporate governance?

Corporate governance matters for development

1. Increased access to financing investment, growth, employment

2. Lower cost of capital and higher valuation investment, growth

3. Better operational performance better allocation of resources,

better management, creates wealth

4. Less risk, at the firm and country level fewer defaults, fewer

financial crises

5. Better relationship with stakeholders improved environment,

social/labor

6. All of these relationships matter for growth, employment, poverty

reduction

7. Empirical evidence has documented these relationships

- At the level of country, sector and individual firm and

from investor perspective using various techniques

8. Quite strong relationships

- But so far mainly documented for non-financial

corporations that are listed on stock exchanges



What is special about CG of banks?

• Banks are ―special,‖ different from corporations

o Opaque, financial information more obscure: hard to assess

performance and riskiness

o More diverse stakeholders (many depositors and often more

diffuse equity ownership, due to restrictions): makes for less

incentives for monitoring

o Highly leveraged, many short-term claims: risky, easily

subject to bank runs

o Heavily regulated: given systemic importance, as failure can

lead to large output costs, more regulated

• Because special, banks more regulated, with regulations covering

wide area

o Activity restrictions (products, branches), prudential

requirements (loan classification, reserve reqs. etc)

o Regulations often more important than laws

• Government, instead of depositors, debt or equity-holders, takes

role of monitoring banks

o Power lies with government, e.g., supervisor, deposit

insurance agency, central bank

o Raises in turn public governance questions

• Banks enjoy benefits of public safety net



o Banks, as they are of systemic importance, get support, i.e.,

deposit insurance, LOLR, and other (potential) forms of

government support

o Costs of support provided often paid for by government, i.e.,

in the end taxpayers

• Implies banks less subject to normal disciplines

o Debt-holders less likely to exert discipline

o Bankruptcy is applied differently or rarer

o Competition is less intense as entry restricted

o Public safety net is large, creating moral hazard

• Same time, banks more subject to CG-risks

o Opaqueness means scope for entrenchment, shifting of

risks, private benefits and outright misuse (tunneling, insider

lending, expropriation, etc.) larger than for non-financial firms

• As for any firm, bank shareholder value can come from increased

risk-taking

o Shareholder value is residual claim on firm value

o Increased risk-taking raises shareholder values at expenses

of debt claimholders and government



Studies on CG of banks:

Monitoring and risk

• Banks are indeed more difficult to monitor

• Moody‘s and S&P disagreed on only 15% of all non-financial

bond issues, but disagreed on 34% of all financial bond

issues

• Banks are more vulnerable

• Recessions increases spreads on all bond issues, but

increases spreads on riskier banks more than for non-

financial firms

• Partly result of a flight to safety, but also greater vulnerability

of banks compared to non-financial firms

Bank failings and financial crisis

• In practice, banks with weak corporate governance have failed

more often

• Accrued deposit insurance, good summary measure of risk

in banks, higher for weaker CG

• State-owned banks enjoy even larger public subsidy, that is

often misused: poor allocation, large NPLs, e.g., Indonesia,

South Korea, France, Thailand, Mexico, Russia

• Fiscal costs of government support up to 50% of GDP, large

output losses from financial crises

• Countries with weaker corporate governance and poorer

institutions see more crises



What does this imply for bank CG and regulation and supervision?

• Quality of bank CG interfaces with supervision and regulation

o More effective banks‘ CG can aid supervision since with

better CG, banks can be sounder, valuations higher, thereby

making supervision easier

o Good CG-framework can make bank regulation and

supervision less necessary, or at least, different

• Need to consider therefore bank CG and regulation and

supervision together

• Two approaches to CG and supervision

o Basel: capital standards and powerful supervisors

• Market failures/externalities, so need regulations

o Empower private sector through laws & information

• Market failures, but also government failures

• Approaches not mutually exclusive

o What is best mix of private market and government oversight

of banks? What does this imply for bank CG?



Implications for CG of banks

• Bank ownership

o Be very careful on state ownership: negatively related to

valuation, stability and efficiency

o Consider inviting foreign banks

• Bank governance, regulation and supervision

o Strong private owners necessary, but they need to have their

own capital at stake

o Better shareholder protection laws can improve functioning

of banks

o Supervision/regulation less effective in monitoring banks



XX. BIBLIOGRAPHY AND WEBLIOGRAPHY:-

BIBLIOGRAPHY

Innovation in banking and insurance

- By Romeo. S. Mascarenhas

WEBLIOGRAPHY

www.wikipedia.org

www.allahabadbank.com

www.allahabadbank.com

www.nfcgindia.org

www.financialexpress.com

rbidocs.rbi.org.in

www.biecco.gov.in

www.iba.org.in

http://www.iba.org.in/

Corporate Governance in Banks

Documents