Ever Note
Ever Note
Ever Note
1.0 Introduction
The Committee to Review Governance of Boards of
Banks in Indiawas constituted by the RBI Governor on
20th January, 2014, under the chairmanship of former
Axis Bank Chairman P.J. Nayak. Following have been its
Terms of Reference.
1.1 Terms of Reference
1. review of the regulatory compliance requirement of
the boards of banks
2. the working of these boards
3. regulatory guidelines on bank
ownership/concentration and
4. an examination of board compensation guidelines
1.2 Background to the constitution of the committee
RBI sought a committee which could clinically dissect
the reasons behind inherent inefficiency of the
public sector banking industry that has lately been piling
up bad non-performing assets.
Incidentally, weeks after the Nayak committee was
constituted in January, RBI wrote a long letter to then
financial services secretary, on what ails the public sector
banks. Many of the issues that affect bank governance
ranging from tenure of the chairman to composition of
a bank board and government ownershipwere
characterized as independent.
l) A lead independent director would be nominated for each
bank board by the set of independent
directors. BIC would define the role of such directors.
m) BIC ceases to exercise ownership functions, and morphs
instead into exercising investor functions.
n) Consequently, BIC is tasked with the responsibilityof
protecting the Government's financial investment
in the banks, by raising the financial returns to the
Government.
The CEO of the Bank Investment Company (BIC) would be
tasked with putting together the BIC staff team. BIC
employees would be incentivized based on the financial
returns that the banks deliver.If such incentivization
requires the Government to hold less than 50 per cent of
equity in BIC, the Government should considerdoing so,
as it will be the prime financial beneficiary of BIC's success.
1.5.2 The end of dual regulation:
Commission,
from the Right to Information Act, and
From Government constraints on employee
compensation.
Vigilance enforcement and compensation policy will
thereafter be the responsibility of bank boards.
1.6 Ownership Issues and Boards of Private Sector Banks
Problems and Recommendations
1.6.1Governance issues in private sector banks originate from
an altogether different set of concerns. There are
issues which arise from ownership constraints stipulated by
RBI, which could misalign the interests of
shareholders with those of the management. In several other
jurisdictions, these constraints are less rigid.
Rigidity keeps out certain kinds of investors and thereby
reduces the pool of capital that banks couldotherwise
attract. When individual shareholdings are small, investors
also tend to be more disengaged.
Allowing larger block shareholders generally enhances
governance. In order to permit certain kinds of
With RBI also having moved away from detailed to riskbased supervision, the annual financial
inspections investigate the asset quality reportingaccuracy of
banks less rigorously. It appears desirable
therefore that RBI conducts random and detailed checks on
asset quality in these banks.
1.6.5Boards should also define for third-party productswhat
constitutes proper selling practices. Products need to be
matched with customer demographics, customer income
and wealth, and customer risk-appetite.
1.6.6 The minimum and maximum age prescribed by the
Companies Act at the time of appointment should
be applicable to all directors of private sector banks. For
whole-time directors, the maximum age should be 65.
1.6.7 Profit-based commissions for non-executive directors
should be permitted in, but not before, Phase 3 of the
transition process as described above.
1.6.8 Old private sector banks typically began as community
banks, although some have attempted to outgrow their
historical origins and imitate the new private sector banks,
bringing in diversified boards and broad basing senior
management. However, many other banks have
management styles where the community hold
remains intact, either tacit or explicit. The designation of a
'promoter director' then develops, who controls
shareholder voting, the board and the employees. The CEO
thereby becomes disempowered.