Introduction
A bank serves the whole economy financially. And infect they not only responsible for financial support to the country but also responsible for the interest of stakeholders, employees and the security of money of customers. So the effect of potential bank failure is too damaging for both the economy and the society, as we have a great example of the 2008 financial crisis.
So here to protect the country and society from these damaging outcomes. Our banking system needs a good governance in terms of accountability, transparency, responsiveness, equitability, efficiency. That is consensus-oriented and which follows the rule of law.
Corporate Governance
Corporate governance deals with the supervision of corporate institutions. That if they are not involve in any malicious practice that can cause financial harm to the society. It works as a watchdog over the financial institutions and company to check their transactional a
ctivities. It decides the rules, regulations, and restrictions under which all the institutions and companies should work accordingly.
The rise of corporate governance took place after the Watergate scandal in the USA. This showed the need of regulating the corporate sector. As the outcome of the investigation, the Foreign and Corrupt practices Act of 1977 enacted. The scope of the act is towards the establishment, maintenance, and review of the internal system. It further controlled by the Securities and Exchange Commission of the USA.
The latest reason for enhancing governance in the banking sector is the financial crisis of 2007-2008. In which the financial giants like Lehman brothers declared bankrupt and many other huge firms like AIG, Freddie Mac, and Royal Bank of Scotland. Other came close to bankruptcy and saved by government intervention.
The purpose of governance in the banking system is to secure and strengthen the accountability, trust, credibility, transparency and integrity in the system. If there is no watchman to regulate the governance in the banking systems then banks will start to decide and work on their own measures and that can create a massive chaos in society.
Corporate Governance in the Indian Banking System
In India, RBI is sovereign over all the banks, either they are government subsidiaries or private banks. RBI works as a watchdog over every bank for regulating governance in the banking sector. RBI is the central bank of India responsible for the regulation of all the issues related to currency and foreign exchange reserves etc. It is responsible for the monetary stability of our country.
The preamble of the Reserve Bank of India Act, 1934 recites, “An Act to constitute a Reserve Bank of India. Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Banknotes. The keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; And whereas in the present disorganization of the monetary systems of the world it is not possible to determine what will be suitable as a permanent basis for the Indian monetary system; But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures. ”[1]
Corporate governance in banks not only targets the monetary stability but also to keep a check on illegal transactions, money laundering, financing immoral and criminal acts, and transaction of money to the terrorists. The most recent example of targeting illegal financing was demonetization, it strikes very hard at the organizations involved in printing fake money and keeping black money[2].
RBI governs the banks on three aspects:
- Disclosure and transparency
- Off-site surveillance
- Prompt corrective action
Disclosure and transparency:
It is one of the most important measures in corporate governance. This means to discloser of all transaction details to the RBI. So that RBI can examine that if the bank is working according to regulations and under restrictions imposed by RBI. RBI through the requirement of routine reporting of financial statements keeps its eyes on the activities of banks. Any delay by banks to fulfill these requirements set out by RBI can cause the imposition of a great fine on banks too.
Off-site surveillance:
To promote the corporate governance in the banking sector, RBI enacted the off-site surveillance function in 1995 to inspect the domestic operations of the banks[3]. The main aim of this inspection is to monitor the financial health of banks between two on-site inspections. Off-site inspection helps RBI to take timely action so that things can be controlled timely.
In this process banks need to provide DSB returns. DSB returns are statutory returns that are called by RBI in exercise of the power vested u/s 27(2) of the banking regulation act. Non-submission or wrong reporting in these returns attracts penalties as specified in section 46 of the act.
Prompt corrective action:
In this aspect RBI has chosen three main measures CRAR, NPA, ROA. Based on these measures banks have to follow a structured action plan that’s called a mandatory action plan. The actions given in this plan are mandatory for the banks to restore their financial health. While the other actions are governed by the suggestion of RBI.
Conclusion
Corporate governance is not only a formality for the banking system but the need of the society and economy. Every country has its subsidiary like RBI that keep looking into activities undertaken by the bank and all the transaction going into the bank. In the US it is IRS who monitors all the transactions and activities undertaken by banks.
Banks are pivotal to every country’s economy and their one mistake or wrong step can be devastating to the whole economy and society so corporate governance is a method through which banks can be managed properly with government support.
References:
[1] Preamble of RBI
[2] Zeenews.india.com
[3] Department of banking supervision, about us, RBI
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