CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR
*Md. Baharul Islam
ABSTRACT
INTRODUCTION:
Corporate governance is “the system by which companies are directed and controlled”. It involves regulatory and market mechanisms and the roles and relationships between a company’s management’ its board its shareholders’ and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation activities. Internal shareholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflict
…show more content…
Governance of banks crucial for growth and development since banks mobilize and allocate society’s savings. Especially in developing countries, banks can be very important source of external financing for firms.
4. Banks exert corporate governance over firms, especially small firms that have no direct access to financial markets. Banks’ corporate governance gets reflected in corporate governance of firms they lend to.
5. To the extent that banks have systematic implications, corporate governance in the banks is of critical importance.
6. Given the dominance of public ownership in the banking system in India, corporate practices in the banking sector would also set the standards for corporate governance in the private sector.
7. With a view to reducing the possible fiscal burden of recapitalising the PSBs, attention towards corporate governance in the banking sector assumes added importance.
8. It affects banks’ valuation and their cost of capital. Corporate Governance of banks thereby affects the cost of capital of the firms and households they lend to.
9. The Reserve Bank of India, as a regulator, has the responsibility on the nature of corporate governance in the banking sector.
SEBI GUIDELINES ON CORPORATE GOVERNANCE IN
…show more content…
Banks shall realize that the times are changing
The issue of corporate governance has gained attention only in the recent times. Therefore, even the smallest banks need to focus on corporate governance restructuring. This is due to the apparent lack of integrity and values in operation of some large corporations [32].
B. Banks shall establish an Effective, Capable and Reliable Board of Directors
Establishing an effective, capable and reliable board of directors requires involving well qualified and successful individuals with integrity. This implies that a majority of banks’ board of directors should be truly independent directors. The board must be effective and must meet periodically and it should also have long-term policy, strategy and values [33].
C. Banks shall establish a Corporate Code of Ethics for themselves
Corporate ethics and values should be established at the top and should be used to govern the operations of the bank both from long-term and short-term point of view. These codes should be reviewed annually. Unless this exercise is accomplished, executive management cannot anticipate that the rank and file employees will follow such a code on their own [34].
D. Banks shall consider establishing an office of the Chairman of the
Bibliography: Turnbull, S. (1997). Corporate governance: its scope, concerns and theories. Corporate Governance: An International Review, 5 (4), pp. 180--205.
This report gives the brief overview of the concept of corporate governance, its evolution and its significance in the corporate sector. The report highlights various key issues and concerns that are faced by the organizations while effectively implementing and promoting Corporate Governance.
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
The end of 2001 and the start of 2002 saw the end of a period of magnified share prices and booming businesses. All speculations of misrepresentation came to light and those firms which once seem unconquerable were now filing for bankruptcy. Within this essay, I shall discuss the corporate governance mechanisms and failures which led to the Enron scandal resulting in global corporate governance reforms being encouraged.
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor
H1: The size of board of commissioners has a positive effect on financial risk disclosure. Board of commissioners as the culmination of the company's internal management system has a role to supervise activities (Siallagan & Machfoedz, 2006). In addition, Abeysekera (2010) states that the existence of independent commissioners will enhance the reputation as associated with more effective controls and thus to significantly affect the level of compliance of company information disclosure. The same results were also proven in a study conducted by Abraham and Cox (2007).
What do Shinsei bank corporate management learn from the substantial losses in financial crisis is the importance of risk management in corporate governance. The bank should focus on its core competence, the retail banking, and to patch up relations with customers by providing proactive assistance, so as to establishing a stabilized earning bases. Besides, the bank should divest its non-core business assets and make provision for potential risks.
...eve efficient resource allocation. Failure to achieve appropriate and efficient corporate governance could result in sub-optimal allocation of resources, abuses and theft by management, expropriation of outside shareholders and creditors, financial distress and even bankruptcy. While evaluating the role of corporate governance, it is imperative to also consider the levels of development of market institutions and other legal infrastructure including laws and enforcement that provide good standard for investor protection as well as ownership structures.
Banking scenario since 1991 has been a process of transformation and consolidation. With financial sector reforms implementation, the microenvironment of banking sector has undergone a radical change. Almost all insulations to commercial banking have been peeled off and it has been susceptible to all types of exposures now. There has been paradigm shift in operational, functional, environmental, technological spheres. The reforms emphasised the “commercial character” of the banking system and helped the banks to stand on a firm footing. The first phase of reforms directed mainly towards the operational efficiency has brought concepts like prudential accounting norms, Deregulation of Interest Rates, Credit Delivery, Transparency, Capital Adequacy Norms, Autonomy in Management etc. Banks started cleansing their balance sheets, competition led to improvement in their efficiencies and profit concept being recognised as a test of commercial viability. The transparency made them to realise their own strengths.
Corporate governance is the policies, rules and regulations, by which a corporation shapes the way corporate officers, managers, and stakeholders perform their duties to create wealth for the entity. According to Lipman (2006), good corporate governance helps to prevent corporate scandals, fraud, and potential civil and criminal liability of the organization (p. 3). Most companies, whether formal or informal, have some type of corporate governance for the management to follow. Large companies will have a formal set of rules and regulations, while small companies frequently have spoken rules often due to lack time to form any type of formal policies. There is often no corporate governance with family owned companies.
Corporate governance often refers to a set of rules and principles by which a company is directed. It provides a guideline for directing a company in order to fulfil its objective, brings added value to the enterprise, and is beneficial to the shareholders in long-term. (1) The rules and principals of corporate governance to an extent might be different in various companies, but some of these rules are similar in all the firms; such as accountability and responsibility towards the shareholders and commitment to conducting business in an ethical manner. (2)
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.
...ng than others is hardly determined. Since the standard in a bank and the banking system depends on the licensing authorities, shareholders, sponsors/directors, top management, the regulators, and the government, it follows that for ethical dilemmas in the banking sector to be managed, all stakeholders must be up and doing. It is essential for a bank to be clear about the key ethical values to which it subscribes. It then needs to ensure that the organization and the employee act in accordance with these values. It is also necessary to have policies and procedures designed to ensure Compliance with the standards specified in the code of conduct. Codes of conduct and the means to enforce them are important tools for management of ethical issues and attitude in the banking sector. However, narrow compliance-based approach towards ethics management should be avoided.
The failure of adequate board accountability has indicated strong adverse effects on corporate performance including, the bankruptcy of various public companies, thereby casting serious doubt on the credibility and efficacy of board accountability. For example, Lehman Brothers scandal, the largest bankruptcy in U.S history, Northern Rock was a large failure of a financial institution in the United Kingdom (Hull 2015:16). In Ireland, the Anglo-Irish Bank created a huge bubble that plunged the state into economic recession. In September 28, 2008, the Irish Government signed into law, the “bank guarantee” which provided with immediate effect a guarantee arrangement to safeguard all deposits in retail, commercial, institutional and interbank transactions, covered bonds, senior debt and dated subordinated debt (Lenihan 2008). Banks in Ireland clearly needed yet more capital from the State (Irish Times 19 November 2011) and this underscores the need for the government’s bailout
It is a known fact that the banking industry plays a huge role in today’s society, the industry has grown rapidly of many decades and still growing. The banking sector is that sector of the society that is actually responsible for the handling of financial assets for other sector of the economy, they do this by investing the financial assets in order to create more wealth in the society while regulating all the activities involved in the process. (What is the banking Sector 2015)