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Corporate Governance in Banks
Bank closures, Financial frauds and regulatory failures across the world led to review of governance structure and practices in banks. At global level these initiatives caused the formation of Cadbury Committee in U.K., laid down on the basis of OECD Principles of Corporate Governance and Basel Committee. In India, several expert committees such as K.M.BirlaCommittee, Narayana Murthy Committee, Naresh Chandra Committee have recommended the implementation of corporate governance norms suggested by them. RBI norms, Basel Committee recommendations and IFRS requirements aim at improving corporate governance practices in banks.
Corporate governance norms streamlines provisions relating to minority shareholders, shareholder protection, Board structure, Board committees, audit committee responsibilities and disclosure practices. All banking companies have been directed to adopt corporate governance norms in India.
In order to improve effective Board function the Board structure has been reviewed to include larger proportion of independent directors. If the chairman is a non executive director Board should have independent directors to the extent of one third of the total membership. If the chairman is not a non executive director, the board should have fifty percent of independent directors. Besides Board should constitute nomination committee, remuneration committee and audit committee to assist the Board to carry out its functions.
Audit committee should have a non executive chairman and its members must have knowledge of finance.
The bank is required to lay down systems and procedures for risk assessment and reporting. Audit committee has to review adequacy of internal control systems and risk management procedures. Corporate governance norms lay a great emphasis on quality of audit reports.
The annual reports of the banks should have a separate section dealing with corporate governance reporting. The disclosure practices in banks are required to confirm to IFRS requirements, international standards on auditing and institute of chartered accountant of India standards.
By laying down corporate governance norms for banks, it is expected to bring greater openness, accountability, transparency, responsibility and risk management.
Questions
- What are the factors to be considered for assessing financial performance of a bank?
- Describe the framework for bank performance assessment.
- What are the parameters for assessing branch performance?
- Discuss the methods of assessing return, risk and capital adequacy in banks.
- Explain how data envelopment analysis can be applied to a bank.
- Explain the need for rating banks.
- What are the factors to be considered for rating of bank performance?
- Explain CAMELS model of rating banks.
- Discuss the importance of improving governance in banks.
- Explain the new framework of corporate governance for banks as per the recommendations of expert committees.
