Make details on bank directors public — RBI panel

A time frame of two to three years is considered adequate for the purpose of establishing independent risk management functions, according to the RBI-appointed group. Banks did not have compensation or nomination committees and members of the board of directors were required to give their valuable time to the governance of banks, it said.

In this context, there was a need for a ceiling on the member of boards and committees a director could work on at a time, the RBI-appointed group said. Because of RBI/Government ownership of banks (in the public sector), there was some overlap in the role of the RBI as owner/owner’s representative and as regulator/supervisor, it noted, adding that this overlap needed to be corrected so that the apex bank could perform its regulatory/supervisory role without any hindrance.

It said government ownership of banks was not conducive to serious and urgent corrective action by the regulator against any one of them. The limitations of the legal process had also come in the way even where corrective action like removal of an incompetent management was contemplated, it said.

It was desirable that performance measurement be extended downward to individuals and a linkage established between contribution and remuneration/reward, it said.

It should be possible if a consensus could be achieved between the unions and the management on converting the present flat and performance-unrelated remuneration structure prevalent in most banks into a performance-related remuneration structure, it said, advocating a link between performance and remuneration.

The group felt that the character of a bank’s ownerships not a critical factor in establishing corporate governance (CG) practices but the quality should be the same in all types of banking organisations irrespective of their ownership. Though the extent of compliance with CG standards could vary from bank to bank, it was desirable that all banks remained above a certain benchmark, representing an acceptable standard of CG, it said.

From this level there would have to be a sustained progress towards the best international standards which would need to be achieved within a reasonable time frame, it added.

There was an urgent need to follow the best practices in the banks in respect of constitution and functioning of the Boards, it said, suggesting streamlining of the process of induction of directors into banks’ boards and their orientation.

The banks’ boards did not seem to subject themselves to any measure of accountability or performance either set by themselves voluntarily or made applicable to them externally, it noted, adding that this left them largely without any accountability either to the institution or to the supervisor.

The stress on accountability generally ended up with efforts to fix accountability at the management level for loans/advances that went bad. Accountability for non-performance, at any level, including that of the board, was nearly absent. This situation called for correction and the current standards of transparency would need to be raised, it observed.

The group felt that public disclosure of information andE resultant discipline constituted the key elements of an effectively supervised, safe and sound banking system.

Lack of transparency tended to negatively distort riskperceptions in the market and increase the intrinsic fragility of individual banking institutions apart from bearing seeds of systemic disturbances, it said.

Since disclosures in India were still in an evolutionarystage and additional disclosures were getting added to the disclosure requirements, it was desirable to review and update the guidelines from time to time until the Indian disclosures fully matched the international standards in this regard, it added.

The committee suggested that initially, updating of theseguidelines could be undertaken at shorter, say, biennial intervals and a co-ordinated approach between the ICAI and RBI adopted for this purpose.

The group, on examination of the current practices asagainst the standards suggested by the Basle Committee on Banking Supervision (BCBS), felt that several changes needed to be made in disclosure practices in regard to general balance sheet disclosures, risk management and management and internal control.

Within the general balance sheet disclosures, it calledfor a complete breakdown of income to facilitate a meaningful assessment of the quality of income and inter-bank comparison.

It wanted a break-up of contribution of differenttivities to assess the diversification in the banks’ business and individual contribution of different businesses. Factors that affected current and next year’s profitability should be discussed explicitly in management discussions, it said.

Disclosure by banks needed to be made uniform in regardto the broad structure of board committees and membership, senior management structure and the basic organisational structure, it added.

On supervision of cross-border banking in the changingworld-wide scenario of banking, the advisory group felt that there was now an overall need to strengthen further the system of cross-border supervision.

The main concerns in the area of cross-border supervisionrelated to sharing of information between RBI and overseas supervisors, consolidated supervision and stronger internal control over operations of foreign branches of Indian banks operating abroad and of branches of foreign banks operating in the country.

On banks’ internal rating systems, the advisory groupid these were vital in improving the competitiveness of the Indian banking system and in ensuring its long-term stability.

In fact, banks were still in the process of putting inplace more sophisticated risk management practices. This was because, in a highly regulated environment, some of the major risks were practically absent in the system.

The group diagnosed that banks in India were handicappedin implementing internal rating systems due to lack of qualified personnel, absence of reliable high frequency historical data and lack of proper appreciation of risk management concepts at the middle and senior management levels.

Banks in India needed to adopt at an early date system ofinternal rating, requiring measurement of probability of default (PD), loss given default (LGD) and exposure at the time of default (EAD), it said.

In the Indian context, the group said, it would benecessary to strengthen the MIS and data collection machinery in the banks to ensure integrity and reliability of data.

It would take another three to five years before thewhole banking system could expect to reach the level of risk management envisaged in the BIS paper, it said.

Currently, only a few banks were using rating systems formanagement reporting and pricing of loans and none used internal ratings for decisions on reserve levels, allocation of economic capital, compensation or for setting credit limits, it said.

The banks that were not following the practice of usinginternal rating for management reporting and pricing could be advised by RBI to do so, the group said.