25-09-2012, 11:09 AM
CORPORATE GOVERNANCE IN INDIAN BANKS
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ABSTRACT
In banking parlance, the Corporate Governance refers to conducting the affairs of a banking organization in such a manner that gives a fair deal to all the stake holders i.e. shareholders, bank customers, regulatory authority, society at large, employees etc. The system of corporate governance is important for banks in India also because, majority of the banks are in public sector, where they are not only competing with one another but with other players in the banking system as well as in financial services system including Financial Institutions, Mutual Funds and other intermediaries, in a new environment of liberalization and globalization. Further, with restrictive support available from the Govt. for further capitalization of banks, many banks may have to go for public issues, leading to transformation of ownership. The concept of corporate governance is on the starting stage in the Indian banking sector although they are practicing it from more than a decade. Both private and public sector banks are following the mandatory guidelines which bring the transparency in the banking sector but still there more proper implementation of corporate governance principles is required.
Introduction
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled. Corporate governance also includes the relationships among the many stakeholders involved 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's activities. Internal stakeholders are the board of directors, executives, and other employees. It guarantees that an enterprise is directed and controlled in a responsible, professional, and transparent manner with the purpose of safeguarding its long-term success. It is intended to increase the confidence of shareholders and capital-market investors. There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large corporations, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).
Indian Banking Industry
Indian banking has around 200 years of history and has undergone many transformations since independence. But, Liberalization, Privatization and Globalization and Information Technology are currently changing the Indian banking radically.
Earlier, banking was virtually a monopoly of the public sector banks with full protection from the State. But the process of reforms in the Indian banking system has thrown them out to more liberal and free market forces. Now the banks, more particularly the public sector ones, feel the real heat of the competition. The interest rate cuts, dwindling margins and more number of players to serve a reduced number of bankable clients have all added to the worries of the banks. The customer has finally come to hold the center stage and all banking products are tailor-made to suit his tastes and preferences. This sudden change in the banking environment has bereaved the banks of all their comforts and many of them are finding it extremely difficult to cope with the change.
Evolution of Corporate Governance of Banks in India.
In the pre-reform era, there were very few regulatory guidelines covering corporate governance of banks. After liberalization in 1991 large number of private sector banks come into being and government control starts reducing from banking sector the concept of corporate governance came into being. There are several factors which lead to the change in the system of corporate governance in banks. These factors are:
• Growth in the competition among banks: with the entry of private sector banks in the economy the completion starts among banks on the level of customer service. As customers were now able to vote with their feet, the quality of customer service became an important variable in protecting, and then increasing, market share.
• Entry of institutional and retail shareholders and listing on stock exchanges: Brought about marked changes in their corporate governance standards. Directors representing private shareholders brought new perspectives to board deliberations, and the interests of private shareholders began to have an impact on strategic decisions. On top of this, the listing requirements of SEBI enhanced the standards of disclosure and transparency.
• To enable them to face the growing competition, public sector banks were accorded larger autonomy: They could now decide on virtually the entire gamut of human resources issues, and subject to prevailing regulation, were free to undertake acquisition of businesses, close or merge unviable branches, open overseas offices, set up subsidiaries, take up new lines of business or exit existing ones, all without any need for prior approval from the Government. All this meant that greater autonomy to the boards of public sector banks came with bigger responsibility.
How Corporate Governance in Banks are Different
Corporate governance in banks is different as well as critical because are the wheels of country’s economy so the proper corporate governance in banks are very important. Because of the nature of banks operation they are highly leveraged they accept deposits from customers and then lend those funds for various types of loans to customers. These loans are sometime uncollateralized. This process makes banks different from other corporate.
If one corporate fails then the effect of that failure will be on that particular corporate only but if a bank fails then it will affect other banks as well as the whole financial system of the country.
As we see that banks operation is different from other corporate as well as their failure will lead to more severe consequences on the whole economy there corporate governance is also different. Boards and senior managements of banks have to be sensitive to the interests of the depositors, be aware of the potentially destructive consequences of excessive risk taking, be alert to warning signals and be wise enough to contain irrational exuberance.
Conclusion
Corporate governance is very significant after globalization and liberalization. If the Indian banks wants to survive in the era of globalization they need to take the issue of corporate governance seriously. Banks and government although taken steps in the area of corporate governance by adopting the practice of capital adequacy, ALM and risk management but still they need to have a sound self appraisal system and they should also try to bring transparency so that corporate governance become more effective. Banks also need to make their risk management system more effective. The excellence in term of customer satisfaction and corporate social responsibility can’t be achieved without a proper corporate governance system.