Comparative Corporate Governance Practices | RBI Grade B Phase 2 Preparation - Bank Exams PDF Download

 Page 1


 
 
123 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
UNIT 7 COMPARATIVE CORPORATE 
GOVERNANCE PRACTICES  
Objectives 
After reading this unit you should be able to; 
? explain the background and relevance of sound corporate governance 
principles 
? discuss the evolution of corporate governance framework for commercial 
& co-operative Banks 
? elaborate the status of corporate governance in Public Sector Banks 
(PSB
S
) 
? describe the status of corporate governance in Private Sector Banks 
(PB
S
) 
? explain the status of corporate governance in Foreign Banks (FB
s
) 
? highlight the status of corporate governance in Co-operative Banks. 
Structure  
7.1 Introduction  
7.2 Definition & Evolution of Corporate Governance  
7.3 Historical Perspective 
7.4 Corporate Governance Framework in Banks 
7.5 Corporate Governance in Commercial Banks  
7.5.1 Corporate Governance in Public Sector Banks (PSB
S
) 
7.5.2 Corporate Governance in Private Sector Banks (PB
S
) 
7.6 Corporate Governance in Foreign Banks in India (FB
s
) 
7.7 Corporate Governance in Co-operative Banks 
7.8 Summary 
7.9 Key Words 
7.10 Self- Assessment Questions  
7.11 References/Further Readings  
7.1 INTRODUCTION 
A bank is a financial institution licensed to receive deposits and make loans. 
Banks may also provide financial services such as wealth management, 
currency exchange and safe deposit boxes. 
Banks are very important part of economy as they undertake specialized 
functions in financial intermediation and payment system. Occupying a pivot 
 
Page 2


 
 
123 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
UNIT 7 COMPARATIVE CORPORATE 
GOVERNANCE PRACTICES  
Objectives 
After reading this unit you should be able to; 
? explain the background and relevance of sound corporate governance 
principles 
? discuss the evolution of corporate governance framework for commercial 
& co-operative Banks 
? elaborate the status of corporate governance in Public Sector Banks 
(PSB
S
) 
? describe the status of corporate governance in Private Sector Banks 
(PB
S
) 
? explain the status of corporate governance in Foreign Banks (FB
s
) 
? highlight the status of corporate governance in Co-operative Banks. 
Structure  
7.1 Introduction  
7.2 Definition & Evolution of Corporate Governance  
7.3 Historical Perspective 
7.4 Corporate Governance Framework in Banks 
7.5 Corporate Governance in Commercial Banks  
7.5.1 Corporate Governance in Public Sector Banks (PSB
S
) 
7.5.2 Corporate Governance in Private Sector Banks (PB
S
) 
7.6 Corporate Governance in Foreign Banks in India (FB
s
) 
7.7 Corporate Governance in Co-operative Banks 
7.8 Summary 
7.9 Key Words 
7.10 Self- Assessment Questions  
7.11 References/Further Readings  
7.1 INTRODUCTION 
A bank is a financial institution licensed to receive deposits and make loans. 
Banks may also provide financial services such as wealth management, 
currency exchange and safe deposit boxes. 
Banks are very important part of economy as they undertake specialized 
functions in financial intermediation and payment system. Occupying a pivot 
 
 
 
124 
Corporate Governance 
in Banking 
position in the organized money market, they have acquired a special place 
with their large network of branches, huge deposits and advances. 
The banking industry plays a dynamic role in the economic development of a 
country. They act as a short as well as the power house of the country’s 
wealth. They accept deposits from individuals & corporate and lend to the 
businesses. They use the deposits collected for productive purposes which 
help in the capital formation in the country. 
Today, the Indian banking system is known all over the world for its 
robustness. The RBI is the central/apex bank which regulates the functioning 
of all the banks operating within the country. 
The organized banking system, largely, comprises of scheduled banks (banks 
that are listed under II schedule of RBI act 1934) whereas unscheduled banks 
form a very small component (which function in the form of local area 
Banks). Scheduled Banks are further classified into commercial and co-
operative banks, with the basic difference in their holding pattern. The 
banking needs of financially excluded population is catered by other 
unorganized entities distinct  from banks such as money lenders, brokers & 
indigenous bankers.  
 
A commercial bank is a joint-stock company whose shares are listed and 
traded. The value of shares is determined by the market forces considering 
the commercial viability of the entity bank. A bank is a company governed 
under Companies Act, 2013 and whose sole business is of banking as defined 
under Banking Regulation Act, 1949
1
 and whose objective is to make profit 
for accounting purpose so as to give returns to its stakeholders. However, 
banks also have a larger objective towards society in terms of delivering 
customised services to their customers and protecting the interest of 
depositors alike. For a long time since independence till the last decade of 
bygone century, the banks ignored profitability at the cost of providing 
services to society. 
The landscape of commercial banking in India changed drastically with the 
reforms introduced post 1991’s economic policy of Liberalisation, Privatization, 
                                                           
1
Banking Regulation Act, 1949 Clause b, Section 5 Interpretation. Retrieved from 
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf 
Page 3


 
 
123 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
UNIT 7 COMPARATIVE CORPORATE 
GOVERNANCE PRACTICES  
Objectives 
After reading this unit you should be able to; 
? explain the background and relevance of sound corporate governance 
principles 
? discuss the evolution of corporate governance framework for commercial 
& co-operative Banks 
? elaborate the status of corporate governance in Public Sector Banks 
(PSB
S
) 
? describe the status of corporate governance in Private Sector Banks 
(PB
S
) 
? explain the status of corporate governance in Foreign Banks (FB
s
) 
? highlight the status of corporate governance in Co-operative Banks. 
Structure  
7.1 Introduction  
7.2 Definition & Evolution of Corporate Governance  
7.3 Historical Perspective 
7.4 Corporate Governance Framework in Banks 
7.5 Corporate Governance in Commercial Banks  
7.5.1 Corporate Governance in Public Sector Banks (PSB
S
) 
7.5.2 Corporate Governance in Private Sector Banks (PB
S
) 
7.6 Corporate Governance in Foreign Banks in India (FB
s
) 
7.7 Corporate Governance in Co-operative Banks 
7.8 Summary 
7.9 Key Words 
7.10 Self- Assessment Questions  
7.11 References/Further Readings  
7.1 INTRODUCTION 
A bank is a financial institution licensed to receive deposits and make loans. 
Banks may also provide financial services such as wealth management, 
currency exchange and safe deposit boxes. 
Banks are very important part of economy as they undertake specialized 
functions in financial intermediation and payment system. Occupying a pivot 
 
 
 
124 
Corporate Governance 
in Banking 
position in the organized money market, they have acquired a special place 
with their large network of branches, huge deposits and advances. 
The banking industry plays a dynamic role in the economic development of a 
country. They act as a short as well as the power house of the country’s 
wealth. They accept deposits from individuals & corporate and lend to the 
businesses. They use the deposits collected for productive purposes which 
help in the capital formation in the country. 
Today, the Indian banking system is known all over the world for its 
robustness. The RBI is the central/apex bank which regulates the functioning 
of all the banks operating within the country. 
The organized banking system, largely, comprises of scheduled banks (banks 
that are listed under II schedule of RBI act 1934) whereas unscheduled banks 
form a very small component (which function in the form of local area 
Banks). Scheduled Banks are further classified into commercial and co-
operative banks, with the basic difference in their holding pattern. The 
banking needs of financially excluded population is catered by other 
unorganized entities distinct  from banks such as money lenders, brokers & 
indigenous bankers.  
 
A commercial bank is a joint-stock company whose shares are listed and 
traded. The value of shares is determined by the market forces considering 
the commercial viability of the entity bank. A bank is a company governed 
under Companies Act, 2013 and whose sole business is of banking as defined 
under Banking Regulation Act, 1949
1
 and whose objective is to make profit 
for accounting purpose so as to give returns to its stakeholders. However, 
banks also have a larger objective towards society in terms of delivering 
customised services to their customers and protecting the interest of 
depositors alike. For a long time since independence till the last decade of 
bygone century, the banks ignored profitability at the cost of providing 
services to society. 
The landscape of commercial banking in India changed drastically with the 
reforms introduced post 1991’s economic policy of Liberalisation, Privatization, 
                                                           
1
Banking Regulation Act, 1949 Clause b, Section 5 Interpretation. Retrieved from 
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf 
 
 
125 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
and Globalisation. From being mainly a service institution, banks were 
recognised as commercial institutions where profitability and viability is an 
important objective. With the introduction of reforms, commercial banks got 
higher flexibility and freedom under the new regulatory framework to craft 
their independent business plans on both sides of the balance sheet and 
execute a strategy that enhances their competitive edge towards profitability. 
The financial results of banks reveal that reforms have changed the objective 
of banks from social banking (profit for accounting purpose) to more of 
commercial banking (hunt for profit).  
Furthermore the commercial banks can be classified into 3 groups : 
• Public sector Banks (PSBs):- Where the government has the major 
holding and these banks constitute to dominate commercial banking in 
India. 
• Private sector Banks (PBs):- Have been setup in the form of joint stock 
companies under the Indian cos. Act 1956 and are under the control of 
private ownership and not owned by the government or co-operative 
societies. 
• Foreign Banks (FBs):- Also known as foreign exchange Banks operates 
in India but are foreign owned with their head offices in foreign 
countries. 
• Co-operative Banks. Have played a subsequent role in the financial 
system especially at the rural level. A credit co-operative is a voluntary 
association of members for self help catering to the financial needs on 
mutual basis. A Co-operative bank is a financial entity whose members 
are owners and the customers at the same time. These banks are created 
by the people from the same community who share a common interest. 
The banks have democratic member control and member economic 
participation. 
 The co-operative credit structure comprises of rural co-operative credit 
institution and urban co-operative credit institution. Urban co-operative credit 
institutions have a single tier structure; and rural co-op credit institution 
comprising of 2 district structures viz: the short-term & long-term. 
Today, the structure of banking system in India comprises of 12 Public 
Sector Banks, 22 Private Sector Banks, 11 Small Finance Banks, 4 Payment 
Banks, 46 Foreign Sector Banks, and 43 Regional Rural Banks. In addition, 
there are 1539 Urban Cooperative Banks (UCB’s), 96006 Rural Cooperative 
Banks as on December 2020. Out of the total UCBs, around 54 are Scheduled 
Urban Cooperative Banks.
2
 
The penetration of Indian Banking can be understood from the fact that in 
2020-21, the total deposit liabilities of scheduled commercial banks were 
                                                           
2
RBI Report on Trends and Progress of Banking in India, 2020-21, Chapter V Developments in 
Cooperative Banking, Pg no 98-122.  
Page 4


 
 
123 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
UNIT 7 COMPARATIVE CORPORATE 
GOVERNANCE PRACTICES  
Objectives 
After reading this unit you should be able to; 
? explain the background and relevance of sound corporate governance 
principles 
? discuss the evolution of corporate governance framework for commercial 
& co-operative Banks 
? elaborate the status of corporate governance in Public Sector Banks 
(PSB
S
) 
? describe the status of corporate governance in Private Sector Banks 
(PB
S
) 
? explain the status of corporate governance in Foreign Banks (FB
s
) 
? highlight the status of corporate governance in Co-operative Banks. 
Structure  
7.1 Introduction  
7.2 Definition & Evolution of Corporate Governance  
7.3 Historical Perspective 
7.4 Corporate Governance Framework in Banks 
7.5 Corporate Governance in Commercial Banks  
7.5.1 Corporate Governance in Public Sector Banks (PSB
S
) 
7.5.2 Corporate Governance in Private Sector Banks (PB
S
) 
7.6 Corporate Governance in Foreign Banks in India (FB
s
) 
7.7 Corporate Governance in Co-operative Banks 
7.8 Summary 
7.9 Key Words 
7.10 Self- Assessment Questions  
7.11 References/Further Readings  
7.1 INTRODUCTION 
A bank is a financial institution licensed to receive deposits and make loans. 
Banks may also provide financial services such as wealth management, 
currency exchange and safe deposit boxes. 
Banks are very important part of economy as they undertake specialized 
functions in financial intermediation and payment system. Occupying a pivot 
 
 
 
124 
Corporate Governance 
in Banking 
position in the organized money market, they have acquired a special place 
with their large network of branches, huge deposits and advances. 
The banking industry plays a dynamic role in the economic development of a 
country. They act as a short as well as the power house of the country’s 
wealth. They accept deposits from individuals & corporate and lend to the 
businesses. They use the deposits collected for productive purposes which 
help in the capital formation in the country. 
Today, the Indian banking system is known all over the world for its 
robustness. The RBI is the central/apex bank which regulates the functioning 
of all the banks operating within the country. 
The organized banking system, largely, comprises of scheduled banks (banks 
that are listed under II schedule of RBI act 1934) whereas unscheduled banks 
form a very small component (which function in the form of local area 
Banks). Scheduled Banks are further classified into commercial and co-
operative banks, with the basic difference in their holding pattern. The 
banking needs of financially excluded population is catered by other 
unorganized entities distinct  from banks such as money lenders, brokers & 
indigenous bankers.  
 
A commercial bank is a joint-stock company whose shares are listed and 
traded. The value of shares is determined by the market forces considering 
the commercial viability of the entity bank. A bank is a company governed 
under Companies Act, 2013 and whose sole business is of banking as defined 
under Banking Regulation Act, 1949
1
 and whose objective is to make profit 
for accounting purpose so as to give returns to its stakeholders. However, 
banks also have a larger objective towards society in terms of delivering 
customised services to their customers and protecting the interest of 
depositors alike. For a long time since independence till the last decade of 
bygone century, the banks ignored profitability at the cost of providing 
services to society. 
The landscape of commercial banking in India changed drastically with the 
reforms introduced post 1991’s economic policy of Liberalisation, Privatization, 
                                                           
1
Banking Regulation Act, 1949 Clause b, Section 5 Interpretation. Retrieved from 
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf 
 
 
125 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
and Globalisation. From being mainly a service institution, banks were 
recognised as commercial institutions where profitability and viability is an 
important objective. With the introduction of reforms, commercial banks got 
higher flexibility and freedom under the new regulatory framework to craft 
their independent business plans on both sides of the balance sheet and 
execute a strategy that enhances their competitive edge towards profitability. 
The financial results of banks reveal that reforms have changed the objective 
of banks from social banking (profit for accounting purpose) to more of 
commercial banking (hunt for profit).  
Furthermore the commercial banks can be classified into 3 groups : 
• Public sector Banks (PSBs):- Where the government has the major 
holding and these banks constitute to dominate commercial banking in 
India. 
• Private sector Banks (PBs):- Have been setup in the form of joint stock 
companies under the Indian cos. Act 1956 and are under the control of 
private ownership and not owned by the government or co-operative 
societies. 
• Foreign Banks (FBs):- Also known as foreign exchange Banks operates 
in India but are foreign owned with their head offices in foreign 
countries. 
• Co-operative Banks. Have played a subsequent role in the financial 
system especially at the rural level. A credit co-operative is a voluntary 
association of members for self help catering to the financial needs on 
mutual basis. A Co-operative bank is a financial entity whose members 
are owners and the customers at the same time. These banks are created 
by the people from the same community who share a common interest. 
The banks have democratic member control and member economic 
participation. 
 The co-operative credit structure comprises of rural co-operative credit 
institution and urban co-operative credit institution. Urban co-operative credit 
institutions have a single tier structure; and rural co-op credit institution 
comprising of 2 district structures viz: the short-term & long-term. 
Today, the structure of banking system in India comprises of 12 Public 
Sector Banks, 22 Private Sector Banks, 11 Small Finance Banks, 4 Payment 
Banks, 46 Foreign Sector Banks, and 43 Regional Rural Banks. In addition, 
there are 1539 Urban Cooperative Banks (UCB’s), 96006 Rural Cooperative 
Banks as on December 2020. Out of the total UCBs, around 54 are Scheduled 
Urban Cooperative Banks.
2
 
The penetration of Indian Banking can be understood from the fact that in 
2020-21, the total deposit liabilities of scheduled commercial banks were 
                                                           
2
RBI Report on Trends and Progress of Banking in India, 2020-21, Chapter V Developments in 
Cooperative Banking, Pg no 98-122.  
 
 
126 
Corporate Governance 
in Banking 
1,95,94,617 crores, of this nearly 60% were in PSBs, followed by 30% in 
PBs. The total loans and advances were 1,08,20,208 crs distributed among 
public and private sector banks in a similar proportion.
3
 
7.2 DEFINITION & EVOLUTION OF 
CORPORATE GOVERNANCE 
Governance means the process of decision making and the process by which 
decisions are implemented, involving multiple actors. Good governance is 
one which is accountable, transparent, responsive, equitable and inclusive 
effective & efficient, participatory and which is consensus oriented and 
which follows the rule of law.  
Therefore it can be said that corporate governance is the system of rules, 
practices & processes by which an organization is directed & controlled. 
Corporate governance essentially involves balancing the interests of all the 
stakeholders such as shareholders, senior management executives, customers, 
suppliers, financiers, the govt. & the community. 
In the words of Sir Adrian Cadbury, “Corporate governance  is concerned 
with holding the balance between economic & social goals and between 
individual & communal goals. The governance framework is their to 
encourage the efficient use of the resources and equally to require 
accountability for the stewardship of those resources. The aim is to align as 
nearly as possible the interests of individuals, corporations & society.” 
The concept of corporate governance emerged in the late 1980’s when 
several companies collapsed in U.K. because of inadequacy of operating 
control. This led to setting up of “Cadbury committee” on corporate 
governance in 1991 by the London stock exchange. Thereafter the watergate 
scandal in the US was the most immediate reason due to which the need for 
regulating the corporate sector was realised. 
7.3 HISTORICAL PERSPECTIVE 
In 1999, Organisation of Economic Cooperation and Development (OECD) 
comprising of 30 member countries issued a set of principles for corporate 
governance.
4
 These principles gained acceptance among governments, 
corporates, bank policymakers, and investors in all major countries. Since 
then, OECD principles have become a benchmark for sound corporate 
governance. Almost during the same time in 1999, The Basel Committee on 
Banking Supervision published guidelines to help the central banks in 
promoting the adoption of sound corporate governance practices by the 
banking companies
5
. These guidelines were later revised in 2006.  
                                                           
3
 RBI Report on Trends and Progress of Banking in India, 2020-21, Chapter VI Operations and 
Performance of Commercial Banks, Pg no 46-97 
4
OECD Principles of Corporate Governance 1999. Retrieved from https://www.oecd.org/ 
officialdocuments/publicdisplaydocumentpdf/?cote=C/MIN(99)6&docLanguage=En 
5
  Basel Committee on Banking Supervision, Enhancing Corporate Governance for Banking 
Organizations, 1999. Retrieved from https://www.bis.org/publ/bcbs56.pdf 
Page 5


 
 
123 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
UNIT 7 COMPARATIVE CORPORATE 
GOVERNANCE PRACTICES  
Objectives 
After reading this unit you should be able to; 
? explain the background and relevance of sound corporate governance 
principles 
? discuss the evolution of corporate governance framework for commercial 
& co-operative Banks 
? elaborate the status of corporate governance in Public Sector Banks 
(PSB
S
) 
? describe the status of corporate governance in Private Sector Banks 
(PB
S
) 
? explain the status of corporate governance in Foreign Banks (FB
s
) 
? highlight the status of corporate governance in Co-operative Banks. 
Structure  
7.1 Introduction  
7.2 Definition & Evolution of Corporate Governance  
7.3 Historical Perspective 
7.4 Corporate Governance Framework in Banks 
7.5 Corporate Governance in Commercial Banks  
7.5.1 Corporate Governance in Public Sector Banks (PSB
S
) 
7.5.2 Corporate Governance in Private Sector Banks (PB
S
) 
7.6 Corporate Governance in Foreign Banks in India (FB
s
) 
7.7 Corporate Governance in Co-operative Banks 
7.8 Summary 
7.9 Key Words 
7.10 Self- Assessment Questions  
7.11 References/Further Readings  
7.1 INTRODUCTION 
A bank is a financial institution licensed to receive deposits and make loans. 
Banks may also provide financial services such as wealth management, 
currency exchange and safe deposit boxes. 
Banks are very important part of economy as they undertake specialized 
functions in financial intermediation and payment system. Occupying a pivot 
 
 
 
124 
Corporate Governance 
in Banking 
position in the organized money market, they have acquired a special place 
with their large network of branches, huge deposits and advances. 
The banking industry plays a dynamic role in the economic development of a 
country. They act as a short as well as the power house of the country’s 
wealth. They accept deposits from individuals & corporate and lend to the 
businesses. They use the deposits collected for productive purposes which 
help in the capital formation in the country. 
Today, the Indian banking system is known all over the world for its 
robustness. The RBI is the central/apex bank which regulates the functioning 
of all the banks operating within the country. 
The organized banking system, largely, comprises of scheduled banks (banks 
that are listed under II schedule of RBI act 1934) whereas unscheduled banks 
form a very small component (which function in the form of local area 
Banks). Scheduled Banks are further classified into commercial and co-
operative banks, with the basic difference in their holding pattern. The 
banking needs of financially excluded population is catered by other 
unorganized entities distinct  from banks such as money lenders, brokers & 
indigenous bankers.  
 
A commercial bank is a joint-stock company whose shares are listed and 
traded. The value of shares is determined by the market forces considering 
the commercial viability of the entity bank. A bank is a company governed 
under Companies Act, 2013 and whose sole business is of banking as defined 
under Banking Regulation Act, 1949
1
 and whose objective is to make profit 
for accounting purpose so as to give returns to its stakeholders. However, 
banks also have a larger objective towards society in terms of delivering 
customised services to their customers and protecting the interest of 
depositors alike. For a long time since independence till the last decade of 
bygone century, the banks ignored profitability at the cost of providing 
services to society. 
The landscape of commercial banking in India changed drastically with the 
reforms introduced post 1991’s economic policy of Liberalisation, Privatization, 
                                                           
1
Banking Regulation Act, 1949 Clause b, Section 5 Interpretation. Retrieved from 
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf 
 
 
125 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
and Globalisation. From being mainly a service institution, banks were 
recognised as commercial institutions where profitability and viability is an 
important objective. With the introduction of reforms, commercial banks got 
higher flexibility and freedom under the new regulatory framework to craft 
their independent business plans on both sides of the balance sheet and 
execute a strategy that enhances their competitive edge towards profitability. 
The financial results of banks reveal that reforms have changed the objective 
of banks from social banking (profit for accounting purpose) to more of 
commercial banking (hunt for profit).  
Furthermore the commercial banks can be classified into 3 groups : 
• Public sector Banks (PSBs):- Where the government has the major 
holding and these banks constitute to dominate commercial banking in 
India. 
• Private sector Banks (PBs):- Have been setup in the form of joint stock 
companies under the Indian cos. Act 1956 and are under the control of 
private ownership and not owned by the government or co-operative 
societies. 
• Foreign Banks (FBs):- Also known as foreign exchange Banks operates 
in India but are foreign owned with their head offices in foreign 
countries. 
• Co-operative Banks. Have played a subsequent role in the financial 
system especially at the rural level. A credit co-operative is a voluntary 
association of members for self help catering to the financial needs on 
mutual basis. A Co-operative bank is a financial entity whose members 
are owners and the customers at the same time. These banks are created 
by the people from the same community who share a common interest. 
The banks have democratic member control and member economic 
participation. 
 The co-operative credit structure comprises of rural co-operative credit 
institution and urban co-operative credit institution. Urban co-operative credit 
institutions have a single tier structure; and rural co-op credit institution 
comprising of 2 district structures viz: the short-term & long-term. 
Today, the structure of banking system in India comprises of 12 Public 
Sector Banks, 22 Private Sector Banks, 11 Small Finance Banks, 4 Payment 
Banks, 46 Foreign Sector Banks, and 43 Regional Rural Banks. In addition, 
there are 1539 Urban Cooperative Banks (UCB’s), 96006 Rural Cooperative 
Banks as on December 2020. Out of the total UCBs, around 54 are Scheduled 
Urban Cooperative Banks.
2
 
The penetration of Indian Banking can be understood from the fact that in 
2020-21, the total deposit liabilities of scheduled commercial banks were 
                                                           
2
RBI Report on Trends and Progress of Banking in India, 2020-21, Chapter V Developments in 
Cooperative Banking, Pg no 98-122.  
 
 
126 
Corporate Governance 
in Banking 
1,95,94,617 crores, of this nearly 60% were in PSBs, followed by 30% in 
PBs. The total loans and advances were 1,08,20,208 crs distributed among 
public and private sector banks in a similar proportion.
3
 
7.2 DEFINITION & EVOLUTION OF 
CORPORATE GOVERNANCE 
Governance means the process of decision making and the process by which 
decisions are implemented, involving multiple actors. Good governance is 
one which is accountable, transparent, responsive, equitable and inclusive 
effective & efficient, participatory and which is consensus oriented and 
which follows the rule of law.  
Therefore it can be said that corporate governance is the system of rules, 
practices & processes by which an organization is directed & controlled. 
Corporate governance essentially involves balancing the interests of all the 
stakeholders such as shareholders, senior management executives, customers, 
suppliers, financiers, the govt. & the community. 
In the words of Sir Adrian Cadbury, “Corporate governance  is concerned 
with holding the balance between economic & social goals and between 
individual & communal goals. The governance framework is their to 
encourage the efficient use of the resources and equally to require 
accountability for the stewardship of those resources. The aim is to align as 
nearly as possible the interests of individuals, corporations & society.” 
The concept of corporate governance emerged in the late 1980’s when 
several companies collapsed in U.K. because of inadequacy of operating 
control. This led to setting up of “Cadbury committee” on corporate 
governance in 1991 by the London stock exchange. Thereafter the watergate 
scandal in the US was the most immediate reason due to which the need for 
regulating the corporate sector was realised. 
7.3 HISTORICAL PERSPECTIVE 
In 1999, Organisation of Economic Cooperation and Development (OECD) 
comprising of 30 member countries issued a set of principles for corporate 
governance.
4
 These principles gained acceptance among governments, 
corporates, bank policymakers, and investors in all major countries. Since 
then, OECD principles have become a benchmark for sound corporate 
governance. Almost during the same time in 1999, The Basel Committee on 
Banking Supervision published guidelines to help the central banks in 
promoting the adoption of sound corporate governance practices by the 
banking companies
5
. These guidelines were later revised in 2006.  
                                                           
3
 RBI Report on Trends and Progress of Banking in India, 2020-21, Chapter VI Operations and 
Performance of Commercial Banks, Pg no 46-97 
4
OECD Principles of Corporate Governance 1999. Retrieved from https://www.oecd.org/ 
officialdocuments/publicdisplaydocumentpdf/?cote=C/MIN(99)6&docLanguage=En 
5
  Basel Committee on Banking Supervision, Enhancing Corporate Governance for Banking 
Organizations, 1999. Retrieved from https://www.bis.org/publ/bcbs56.pdf 
 
 
127 
Global Perspective: 
Basel Framework 
 
Comparative 
Corporate 
Governance Practices 
It is to be noted that the 1999 guidelines on corporate governance came after 
the much conspicuous ‘Asian Financial Crisis’ of 1997. It was during this 
crisis that deposits offered unreasonably high-interest rates which in turn 
resulted in negative margins leading to depleting profitability of banks and 
letting the interest of shareholders and the economy go for a toss. Almost a 
decade later, in 2007-2009, Global Financial Crisis (GFC) erupted from the 
United States and spread across the globe. The crisis brought extreme stress 
in the financial markets and banking systems across the countries during a 
short period. The impact of the crisis was global due to strong linkages 
among the financial systems across the globe. Several banks incurred losses 
and came on the verge of bankruptcy. Countries witnessed severe 
unemployment and recession. Among major causes of the GFC were; the 
irrationally high risk-taking attitude of the banks, bad quality lending, almost 
missing credit appraisal system, and also the lack of regulation over sub-
prime lending and mortgage-based securities. By the time crisis completely 
unfolded, central banks had no idea to what extent the bad loans and 
mortgage losses were spreading across the financial system in the country.  
Among others, the failure of corporate governance principles was found to be 
a serious cause of the collapse of banking and financial institutions, leading 
to the grave economic crisis. UNCTAD (United Nations Conference on 
Trade and Development) in its 2010 report was the first to highlight poor 
corporate governance practices and inferior risk management systems in the 
financial institutions as the major cause of the crisis
6
. Several types of 
research thereafter proved that Banks and policymakers including the Board 
members of the banks ignored the risk associated with the financial products 
that were offered at that time. The Bank Boards failed to implement risk 
control procedures. On the contrary, these Boards were incentivizing bankers 
on investing in mortgage products, which later turned out to be a faulty 
system and major reason for the financial crisis. Furthermore, the ill-designed 
stock options and exit packages rewarded bankers and investors for high-risk 
investments and sometimes even for their failures. These revelations 
indicated that the Bank Board completely ignored the risk factors while 
approving the strategic decisions related to managing and monitoring the risk 
factors. Also the accounting and regulating environment was lacking 
transparency on off-balance sheet items and shifting the risk on the 
shareholders of the company.  
The financial crisis pushed the functions of corporate governance in the 
banking and financial sector to the top of the agenda. The OECD Steering 
Group on Corporate Governance, 2008
7
 highlighted that the inadequate 
corporate governance practices in remuneration, board operations, 
                                                           
6
  Corporate Governance in the Wake of the Financial Crisis, UNCTAD 2010. Retrieved from 
https://unctad.org/system/files/official-document/diaeed20102_en.pdf 
7
The OECD Steering Group on Corporate Governance, 2008. Retrieved from 
https://www.oecd.org/daf/ca/corporategovernanceprinciples/theoecdsteeringgrouponcorporategovern
ancecontinuesdialoguewithalternativeinvestors.htm