Banking Reform: Tentative Step

Context:  The recent RBI paper on ‘Governance in commercial banks in India’ seeks to bring about governance reform in the private sector, nationalized, and regional banks. 

Proposed Reforms in Banking Governance

• More power to the Bank Boards Bureau as compared to the Chief Executive Officer (CEO).
• Number of board of directors: not less than six and not more than 15, with independent director accounting for a majority.
• Risk-taking: i.e reporting of chief risk officer and the chief compliance office to the risk management committee of the board. 
• Auditing and vigilance: i.e head of internal audit and the chief of internal vigilance would perform under the supervision of the audit committee of the board.
• Compliance: only Non-Executive Directors (NEDs) to be the part of risk committee, audit committee, and proposed nomination and remuneration committee of the board.
• Performance Evaluation: of the NEDs to be evaluated by the entire board, minus the concerned NED.

Way Forward

• Need of outside agency: to monitor board performance as well. 

• Compensation levels: across the board need to be enhanced to deter risky investments. 
• Selection of board members: must be an administered process.
• Regulation of bank bonuses: needs more clear norms.

Conclusion: Discussion of bank governance reform would be incomplete without a discussion of banking supervision reform.