In the backdrop of almost 22,000 bank frauds worth over 3.95 trillion in the past three years, the RBI has decided to tighten its noose on bank governance. It first raised these issues in its ‘Discussion Paper’ dated 11 June 2020, on governance of commercial banks under recommendations made by 'Basel Committee on Banking Supervision'. Its annual report on May 2021 named some vital scams like ICCI-Videocon loan bribery, Nirav Modi and the PNB Scam.
On 26 April 2021, the RBI issued a circular titled 'Corporate Governance in Banks – Appointment of Directors and Constitution of Committees of the Board', which aims at improving bank governance standards by revising the laws pertaining to the selection of a bank's chairman, the term of directors, and the formation of committees in private sector banks, small financing institutions, and fully owned subsidiaries of foreign banks.
Banks have time until 1 October 2021 to comply with the new regulations. Banks will now be required to have an independent director as the chairperson of the board. At least half of the directors present at board meetings must be independent directors. This aims to promote independent and unbiased decision making. The Circular mandates the formation of three specialized board committees: an audit committee, a risk management committee (mandated to hold annual meetings), and a nominating and remuneration committee (with priority-based meetings).
The main purpose is to secure strategic expertise and opinion on key issues of audit, risk surveillance, stakeholder relationship management etc., to improve risk oversight.
Intelawsight: The circular exempts foreign banks which is a concern. Secondly, even though it enhances the role of independent directors to promote fair and unbiased decision making, such directors may not be as well acquainted with the facets of the bank as member directors. Overall, RBI’s circular is a great leap towards better corporate bank governance and risk management.
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