Evolution and Growth of Corporate Governance in Indian Banking | RBI Grade B Phase 2 Preparation - Bank Exams PDF Download

 Page 1


 
 
100 
Corporate Governance 
in Banking 
UNIT 6 EVOLUTION AND GROWTH OF 
CORPORATE GOVERNANCE IN 
INDIAN BANKING  
Objectives 
The objectives of this unit are to:  
? Familiarize with  an overview of  Corporate Governance (CG) 
? Describe the importance and evolution of CG in the banking industry 
? List down the important recommendations of various Committees to 
improve the standards of governance 
? Explain the CG guidelines issued by Bank for International Settlements 
and RBI 
? Elaborate on the legal framework of CG in India 
? Examine over the implementation of CG guidelines 
Structure 
6.1 Introduction 
6.2 Importance of CG in Banks 
6.3 International Perspectives of CG 
6.4 Evolution and Growth of CG in Indian banking - Evolving Stage 
6.5 Evolution and Growth of CG in Indian banking – Development Stage         
6.6 Legal Framework of CG 
6.7 CG Rating and Scorecard 
6.8 Summary 
6.9 Self-Assessment Questions 
6.10 References/Further Reading 
6.1  INTRODUCTION 
Corporate governance (CG) has been actively occupying a prime place in the 
corporate world for the last three decades. Its importance was felt more when 
number of scandals like Watergate (USA), Enron and Lehman Brothers came 
to limelight and caused enough panic and damage in the global financial 
circles. 
The players in the financial market and their constituents realized that good 
corporate governance contributed to the progress of companies and helped 
them in their sustainable growth. However, with globalization and 
liberalization the governance practices needed to be reviewed periodically 
 
Page 2


 
 
100 
Corporate Governance 
in Banking 
UNIT 6 EVOLUTION AND GROWTH OF 
CORPORATE GOVERNANCE IN 
INDIAN BANKING  
Objectives 
The objectives of this unit are to:  
? Familiarize with  an overview of  Corporate Governance (CG) 
? Describe the importance and evolution of CG in the banking industry 
? List down the important recommendations of various Committees to 
improve the standards of governance 
? Explain the CG guidelines issued by Bank for International Settlements 
and RBI 
? Elaborate on the legal framework of CG in India 
? Examine over the implementation of CG guidelines 
Structure 
6.1 Introduction 
6.2 Importance of CG in Banks 
6.3 International Perspectives of CG 
6.4 Evolution and Growth of CG in Indian banking - Evolving Stage 
6.5 Evolution and Growth of CG in Indian banking – Development Stage         
6.6 Legal Framework of CG 
6.7 CG Rating and Scorecard 
6.8 Summary 
6.9 Self-Assessment Questions 
6.10 References/Further Reading 
6.1  INTRODUCTION 
Corporate governance (CG) has been actively occupying a prime place in the 
corporate world for the last three decades. Its importance was felt more when 
number of scandals like Watergate (USA), Enron and Lehman Brothers came 
to limelight and caused enough panic and damage in the global financial 
circles. 
The players in the financial market and their constituents realized that good 
corporate governance contributed to the progress of companies and helped 
them in their sustainable growth. However, with globalization and 
liberalization the governance practices needed to be reviewed periodically 
 
 
 
101 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
and necessary changes needed be incorporated through various regulations 
and enactments. 
The accelerated interest in CG began in 2009, after the Satyam scandal. The 
Company's Act was passed in 2013, which stipulated laws and provisions 
about the constitution of the board, processes, independent directors, 
disclosure requirements, and more.  Securities and Exchange Board of India 
(SEBI) laid down guidelines regarding the rules and regulations that 
companies must follow to ensure the protection of investors. Further, the 
Institute of Chartered Accountants of India (ICAI) issued accounting 
standards for the disclosure of financial information, to protect the interest of 
investors and third parties. It can also be said that the CG in India took a real 
shape during the next or second phase. 
Due to the changes which had been introduced from time to time, it was 
believed that the essence of CG principles enshrined in major three aspects 
‘Transparency, Integrity, and Accountability’. Though it was defined in 
diverse ways by different authors and committees but the crux of the CG 
process is seen in commitment to values, ethical business standards, 
contribution to environment and social causes keeping in mind the interests 
of the stakeholders, which could be achieved only through board 
independence, board accountability and board quality. 
6.2 IMPORTANCE OF CORPORATE 
GOVERNANCE IN BANKS 
Good Corporate Governance is defined as “the application of best 
management practices, compliance of law in true letter & spirit and 
adherence to ethical standards for effective management and distribution of 
wealth and discharge of social responsibility for the sustainable development 
of all the stakeholders.” 
Banks without the above elements in their functioning cannot show 
sustainable growth and may have to exit eventually. The folding of many 
private sector banks, Co-operative banks, and the merger of some of the 
public sector banks with those of bigger banks showed as the results of poor 
CG (Corporate Governance). 
Banks are financial intermediaries; they accept funds from depositors and 
then lend these collected funds to the borrowers after keeping for Cash 
Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR) ratio as 
prescribed by the Reserve Bank of India. The money lent by a bank when 
deposited into demand deposit accounts of the same bank or other banks the 
money supply (M1) increases. In this way the banks can create more lendable 
resources to accelerate economic growth, employment, and prosperity of the 
stakeholders, viz. the owners, depositors, and borrowers (customers), and the 
other stakeholders like employees and creditors. 
Page 3


 
 
100 
Corporate Governance 
in Banking 
UNIT 6 EVOLUTION AND GROWTH OF 
CORPORATE GOVERNANCE IN 
INDIAN BANKING  
Objectives 
The objectives of this unit are to:  
? Familiarize with  an overview of  Corporate Governance (CG) 
? Describe the importance and evolution of CG in the banking industry 
? List down the important recommendations of various Committees to 
improve the standards of governance 
? Explain the CG guidelines issued by Bank for International Settlements 
and RBI 
? Elaborate on the legal framework of CG in India 
? Examine over the implementation of CG guidelines 
Structure 
6.1 Introduction 
6.2 Importance of CG in Banks 
6.3 International Perspectives of CG 
6.4 Evolution and Growth of CG in Indian banking - Evolving Stage 
6.5 Evolution and Growth of CG in Indian banking – Development Stage         
6.6 Legal Framework of CG 
6.7 CG Rating and Scorecard 
6.8 Summary 
6.9 Self-Assessment Questions 
6.10 References/Further Reading 
6.1  INTRODUCTION 
Corporate governance (CG) has been actively occupying a prime place in the 
corporate world for the last three decades. Its importance was felt more when 
number of scandals like Watergate (USA), Enron and Lehman Brothers came 
to limelight and caused enough panic and damage in the global financial 
circles. 
The players in the financial market and their constituents realized that good 
corporate governance contributed to the progress of companies and helped 
them in their sustainable growth. However, with globalization and 
liberalization the governance practices needed to be reviewed periodically 
 
 
 
101 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
and necessary changes needed be incorporated through various regulations 
and enactments. 
The accelerated interest in CG began in 2009, after the Satyam scandal. The 
Company's Act was passed in 2013, which stipulated laws and provisions 
about the constitution of the board, processes, independent directors, 
disclosure requirements, and more.  Securities and Exchange Board of India 
(SEBI) laid down guidelines regarding the rules and regulations that 
companies must follow to ensure the protection of investors. Further, the 
Institute of Chartered Accountants of India (ICAI) issued accounting 
standards for the disclosure of financial information, to protect the interest of 
investors and third parties. It can also be said that the CG in India took a real 
shape during the next or second phase. 
Due to the changes which had been introduced from time to time, it was 
believed that the essence of CG principles enshrined in major three aspects 
‘Transparency, Integrity, and Accountability’. Though it was defined in 
diverse ways by different authors and committees but the crux of the CG 
process is seen in commitment to values, ethical business standards, 
contribution to environment and social causes keeping in mind the interests 
of the stakeholders, which could be achieved only through board 
independence, board accountability and board quality. 
6.2 IMPORTANCE OF CORPORATE 
GOVERNANCE IN BANKS 
Good Corporate Governance is defined as “the application of best 
management practices, compliance of law in true letter & spirit and 
adherence to ethical standards for effective management and distribution of 
wealth and discharge of social responsibility for the sustainable development 
of all the stakeholders.” 
Banks without the above elements in their functioning cannot show 
sustainable growth and may have to exit eventually. The folding of many 
private sector banks, Co-operative banks, and the merger of some of the 
public sector banks with those of bigger banks showed as the results of poor 
CG (Corporate Governance). 
Banks are financial intermediaries; they accept funds from depositors and 
then lend these collected funds to the borrowers after keeping for Cash 
Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR) ratio as 
prescribed by the Reserve Bank of India. The money lent by a bank when 
deposited into demand deposit accounts of the same bank or other banks the 
money supply (M1) increases. In this way the banks can create more lendable 
resources to accelerate economic growth, employment, and prosperity of the 
stakeholders, viz. the owners, depositors, and borrowers (customers), and the 
other stakeholders like employees and creditors. 
 
 
102 
Corporate Governance 
in Banking 
It is apparent from the above that in the business of banking, the capital 
provided by the shareholders is only a small percentage of the total advances 
made by the banks, maximum of the resources come from the depositors. 
That is why the Capital Adequacy Ratio (CAR) of the banks which is 
measured as Capital to Risk Weighted Assets Ratio (CRAR) and Leverage 
Ratio have been introduced along with a slew of measures by Bank for 
International Settlements (BIS). Currently RBI has stipulated the minimum 
CRAR to be maintained by the banks should be 9% on on-going basis. 
(viz.Eligible total Tier 1 Capital /Eligible Assets should be not less than 9%). 
Thus, when a bank lends Rs.100 (risk weighted asset) it must have Rs.9 as 
capital. If the banks keep lending out of the growing deposit sources, they 
need to raise capital also to maintain the minimum capital as stipulated by the 
RBI. If the minimum capital is not maintained, or there is a run on the Bank 
for any other reason the Bank must resort to contingency plans to save the 
situation. Thus, deposit level depleting suddenly due to the perception of the 
Bank becoming negative in the minds of the stakeholders, NPA levels steeply 
going up and return on assets falling drastically, RBI necessarily steps in for 
corrective action.  
Depositors and Investors always look for safe place for investments and for 
higher returns on their investments. Similarly, banks would like to retain the 
existing depositors and investors and would like to attract new depositors and 
investors. The investors/ shareholders may hold the investments for a shorter 
period depending on the market perception of growth, but the depositors 
would like to maintain relations with the banks for a longer period depending 
on the perception of stability of the banks. For example, long term deposits 
fetch higher rates of interest. The stability of the banks can better be seen in 
the good CG and transparent disclosures made at the right time to all the 
stakeholders. The stability factor is equally important from avoiding the 
contagion effect in the financial markets, attracting high degree of oversight 
by the regulator RBI.  
The following reasons are also equally important for high degree of 
oversight: 
? The depositors, especially the retail depositors, pensioners etc. do not 
have adequate information, nor they are able to coordinate with each 
other. 
? Bank assets are unusually opaque and lack transparency as well as 
liquidity. This condition arises because in most bank loans, unlike other 
products and services, are usually customized and privately negotiated. 
Thus, for continued growth the trust of both the depositors and shareholders 
are equally important for the banks. The depositors support loans and 
advances (Credit Portfolio), and the shareholders support the Capital 
Adequacy. In many cases a customer can be both a depositor and a borrower. 
They expect lower interest for loans and advances and higher rates of interest 
Page 4


 
 
100 
Corporate Governance 
in Banking 
UNIT 6 EVOLUTION AND GROWTH OF 
CORPORATE GOVERNANCE IN 
INDIAN BANKING  
Objectives 
The objectives of this unit are to:  
? Familiarize with  an overview of  Corporate Governance (CG) 
? Describe the importance and evolution of CG in the banking industry 
? List down the important recommendations of various Committees to 
improve the standards of governance 
? Explain the CG guidelines issued by Bank for International Settlements 
and RBI 
? Elaborate on the legal framework of CG in India 
? Examine over the implementation of CG guidelines 
Structure 
6.1 Introduction 
6.2 Importance of CG in Banks 
6.3 International Perspectives of CG 
6.4 Evolution and Growth of CG in Indian banking - Evolving Stage 
6.5 Evolution and Growth of CG in Indian banking – Development Stage         
6.6 Legal Framework of CG 
6.7 CG Rating and Scorecard 
6.8 Summary 
6.9 Self-Assessment Questions 
6.10 References/Further Reading 
6.1  INTRODUCTION 
Corporate governance (CG) has been actively occupying a prime place in the 
corporate world for the last three decades. Its importance was felt more when 
number of scandals like Watergate (USA), Enron and Lehman Brothers came 
to limelight and caused enough panic and damage in the global financial 
circles. 
The players in the financial market and their constituents realized that good 
corporate governance contributed to the progress of companies and helped 
them in their sustainable growth. However, with globalization and 
liberalization the governance practices needed to be reviewed periodically 
 
 
 
101 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
and necessary changes needed be incorporated through various regulations 
and enactments. 
The accelerated interest in CG began in 2009, after the Satyam scandal. The 
Company's Act was passed in 2013, which stipulated laws and provisions 
about the constitution of the board, processes, independent directors, 
disclosure requirements, and more.  Securities and Exchange Board of India 
(SEBI) laid down guidelines regarding the rules and regulations that 
companies must follow to ensure the protection of investors. Further, the 
Institute of Chartered Accountants of India (ICAI) issued accounting 
standards for the disclosure of financial information, to protect the interest of 
investors and third parties. It can also be said that the CG in India took a real 
shape during the next or second phase. 
Due to the changes which had been introduced from time to time, it was 
believed that the essence of CG principles enshrined in major three aspects 
‘Transparency, Integrity, and Accountability’. Though it was defined in 
diverse ways by different authors and committees but the crux of the CG 
process is seen in commitment to values, ethical business standards, 
contribution to environment and social causes keeping in mind the interests 
of the stakeholders, which could be achieved only through board 
independence, board accountability and board quality. 
6.2 IMPORTANCE OF CORPORATE 
GOVERNANCE IN BANKS 
Good Corporate Governance is defined as “the application of best 
management practices, compliance of law in true letter & spirit and 
adherence to ethical standards for effective management and distribution of 
wealth and discharge of social responsibility for the sustainable development 
of all the stakeholders.” 
Banks without the above elements in their functioning cannot show 
sustainable growth and may have to exit eventually. The folding of many 
private sector banks, Co-operative banks, and the merger of some of the 
public sector banks with those of bigger banks showed as the results of poor 
CG (Corporate Governance). 
Banks are financial intermediaries; they accept funds from depositors and 
then lend these collected funds to the borrowers after keeping for Cash 
Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR) ratio as 
prescribed by the Reserve Bank of India. The money lent by a bank when 
deposited into demand deposit accounts of the same bank or other banks the 
money supply (M1) increases. In this way the banks can create more lendable 
resources to accelerate economic growth, employment, and prosperity of the 
stakeholders, viz. the owners, depositors, and borrowers (customers), and the 
other stakeholders like employees and creditors. 
 
 
102 
Corporate Governance 
in Banking 
It is apparent from the above that in the business of banking, the capital 
provided by the shareholders is only a small percentage of the total advances 
made by the banks, maximum of the resources come from the depositors. 
That is why the Capital Adequacy Ratio (CAR) of the banks which is 
measured as Capital to Risk Weighted Assets Ratio (CRAR) and Leverage 
Ratio have been introduced along with a slew of measures by Bank for 
International Settlements (BIS). Currently RBI has stipulated the minimum 
CRAR to be maintained by the banks should be 9% on on-going basis. 
(viz.Eligible total Tier 1 Capital /Eligible Assets should be not less than 9%). 
Thus, when a bank lends Rs.100 (risk weighted asset) it must have Rs.9 as 
capital. If the banks keep lending out of the growing deposit sources, they 
need to raise capital also to maintain the minimum capital as stipulated by the 
RBI. If the minimum capital is not maintained, or there is a run on the Bank 
for any other reason the Bank must resort to contingency plans to save the 
situation. Thus, deposit level depleting suddenly due to the perception of the 
Bank becoming negative in the minds of the stakeholders, NPA levels steeply 
going up and return on assets falling drastically, RBI necessarily steps in for 
corrective action.  
Depositors and Investors always look for safe place for investments and for 
higher returns on their investments. Similarly, banks would like to retain the 
existing depositors and investors and would like to attract new depositors and 
investors. The investors/ shareholders may hold the investments for a shorter 
period depending on the market perception of growth, but the depositors 
would like to maintain relations with the banks for a longer period depending 
on the perception of stability of the banks. For example, long term deposits 
fetch higher rates of interest. The stability of the banks can better be seen in 
the good CG and transparent disclosures made at the right time to all the 
stakeholders. The stability factor is equally important from avoiding the 
contagion effect in the financial markets, attracting high degree of oversight 
by the regulator RBI.  
The following reasons are also equally important for high degree of 
oversight: 
? The depositors, especially the retail depositors, pensioners etc. do not 
have adequate information, nor they are able to coordinate with each 
other. 
? Bank assets are unusually opaque and lack transparency as well as 
liquidity. This condition arises because in most bank loans, unlike other 
products and services, are usually customized and privately negotiated. 
Thus, for continued growth the trust of both the depositors and shareholders 
are equally important for the banks. The depositors support loans and 
advances (Credit Portfolio), and the shareholders support the Capital 
Adequacy. In many cases a customer can be both a depositor and a borrower. 
They expect lower interest for loans and advances and higher rates of interest 
 
 
103 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
on deposits. Good governance makes it possible to enhance the trust of the 
depositors, shareholders, and efficient running of the banks.  
Signs of good corporate governance: Citing from the United Nations 
Economic and Social Commission for Asia and the pacific (UNESCAP), the 
concept of good governance has eight principles. 1. Participation, 2. Rule of 
law, 3. Transparency, 4. Responsiveness, 5. Consensus oriented, 6. Equity 
and inclusiveness, 7. Effectiveness and efficiency, 8. Accountability. The 
broad categories of good corporate governance are as follows:   
Commitment to Corporate Governance 
? Board takes responsibility for CG 
? CG is regularly reviewed, and improvements are planned 
? Appropriate resources are committed 
? Policies and procedures are formalized and distributed to the concerned 
staff 
? CG code and/or guidelines are developed or followed 
Good board practices 
? Board role and authority are clearly defined 
? Duties and responsibilities of directors are understood 
? Board is well structured 
? Board has an appropriate composition and mix of skills 
? Appropriate board procedures are in place 
? Director remunerations are in line with best practices 
? Board self-evaluation and training are conducted 
Appropriate Control Environment 
? Independent audit committee established 
? Risk management framework /structure is present 
? Internal control procedures are in place 
? Independent external auditor conducts regular audits 
? Management information systems are established 
Disclosure and Transparency 
? Financial information as well as non-financial information is disclosed 
? Financials are prepared as per the standards prescribed 
? Timely and quality annual reports are published on time 
? Web-based disclosure is made and investors site on the web is created 
 
Page 5


 
 
100 
Corporate Governance 
in Banking 
UNIT 6 EVOLUTION AND GROWTH OF 
CORPORATE GOVERNANCE IN 
INDIAN BANKING  
Objectives 
The objectives of this unit are to:  
? Familiarize with  an overview of  Corporate Governance (CG) 
? Describe the importance and evolution of CG in the banking industry 
? List down the important recommendations of various Committees to 
improve the standards of governance 
? Explain the CG guidelines issued by Bank for International Settlements 
and RBI 
? Elaborate on the legal framework of CG in India 
? Examine over the implementation of CG guidelines 
Structure 
6.1 Introduction 
6.2 Importance of CG in Banks 
6.3 International Perspectives of CG 
6.4 Evolution and Growth of CG in Indian banking - Evolving Stage 
6.5 Evolution and Growth of CG in Indian banking – Development Stage         
6.6 Legal Framework of CG 
6.7 CG Rating and Scorecard 
6.8 Summary 
6.9 Self-Assessment Questions 
6.10 References/Further Reading 
6.1  INTRODUCTION 
Corporate governance (CG) has been actively occupying a prime place in the 
corporate world for the last three decades. Its importance was felt more when 
number of scandals like Watergate (USA), Enron and Lehman Brothers came 
to limelight and caused enough panic and damage in the global financial 
circles. 
The players in the financial market and their constituents realized that good 
corporate governance contributed to the progress of companies and helped 
them in their sustainable growth. However, with globalization and 
liberalization the governance practices needed to be reviewed periodically 
 
 
 
101 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
and necessary changes needed be incorporated through various regulations 
and enactments. 
The accelerated interest in CG began in 2009, after the Satyam scandal. The 
Company's Act was passed in 2013, which stipulated laws and provisions 
about the constitution of the board, processes, independent directors, 
disclosure requirements, and more.  Securities and Exchange Board of India 
(SEBI) laid down guidelines regarding the rules and regulations that 
companies must follow to ensure the protection of investors. Further, the 
Institute of Chartered Accountants of India (ICAI) issued accounting 
standards for the disclosure of financial information, to protect the interest of 
investors and third parties. It can also be said that the CG in India took a real 
shape during the next or second phase. 
Due to the changes which had been introduced from time to time, it was 
believed that the essence of CG principles enshrined in major three aspects 
‘Transparency, Integrity, and Accountability’. Though it was defined in 
diverse ways by different authors and committees but the crux of the CG 
process is seen in commitment to values, ethical business standards, 
contribution to environment and social causes keeping in mind the interests 
of the stakeholders, which could be achieved only through board 
independence, board accountability and board quality. 
6.2 IMPORTANCE OF CORPORATE 
GOVERNANCE IN BANKS 
Good Corporate Governance is defined as “the application of best 
management practices, compliance of law in true letter & spirit and 
adherence to ethical standards for effective management and distribution of 
wealth and discharge of social responsibility for the sustainable development 
of all the stakeholders.” 
Banks without the above elements in their functioning cannot show 
sustainable growth and may have to exit eventually. The folding of many 
private sector banks, Co-operative banks, and the merger of some of the 
public sector banks with those of bigger banks showed as the results of poor 
CG (Corporate Governance). 
Banks are financial intermediaries; they accept funds from depositors and 
then lend these collected funds to the borrowers after keeping for Cash 
Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR) ratio as 
prescribed by the Reserve Bank of India. The money lent by a bank when 
deposited into demand deposit accounts of the same bank or other banks the 
money supply (M1) increases. In this way the banks can create more lendable 
resources to accelerate economic growth, employment, and prosperity of the 
stakeholders, viz. the owners, depositors, and borrowers (customers), and the 
other stakeholders like employees and creditors. 
 
 
102 
Corporate Governance 
in Banking 
It is apparent from the above that in the business of banking, the capital 
provided by the shareholders is only a small percentage of the total advances 
made by the banks, maximum of the resources come from the depositors. 
That is why the Capital Adequacy Ratio (CAR) of the banks which is 
measured as Capital to Risk Weighted Assets Ratio (CRAR) and Leverage 
Ratio have been introduced along with a slew of measures by Bank for 
International Settlements (BIS). Currently RBI has stipulated the minimum 
CRAR to be maintained by the banks should be 9% on on-going basis. 
(viz.Eligible total Tier 1 Capital /Eligible Assets should be not less than 9%). 
Thus, when a bank lends Rs.100 (risk weighted asset) it must have Rs.9 as 
capital. If the banks keep lending out of the growing deposit sources, they 
need to raise capital also to maintain the minimum capital as stipulated by the 
RBI. If the minimum capital is not maintained, or there is a run on the Bank 
for any other reason the Bank must resort to contingency plans to save the 
situation. Thus, deposit level depleting suddenly due to the perception of the 
Bank becoming negative in the minds of the stakeholders, NPA levels steeply 
going up and return on assets falling drastically, RBI necessarily steps in for 
corrective action.  
Depositors and Investors always look for safe place for investments and for 
higher returns on their investments. Similarly, banks would like to retain the 
existing depositors and investors and would like to attract new depositors and 
investors. The investors/ shareholders may hold the investments for a shorter 
period depending on the market perception of growth, but the depositors 
would like to maintain relations with the banks for a longer period depending 
on the perception of stability of the banks. For example, long term deposits 
fetch higher rates of interest. The stability of the banks can better be seen in 
the good CG and transparent disclosures made at the right time to all the 
stakeholders. The stability factor is equally important from avoiding the 
contagion effect in the financial markets, attracting high degree of oversight 
by the regulator RBI.  
The following reasons are also equally important for high degree of 
oversight: 
? The depositors, especially the retail depositors, pensioners etc. do not 
have adequate information, nor they are able to coordinate with each 
other. 
? Bank assets are unusually opaque and lack transparency as well as 
liquidity. This condition arises because in most bank loans, unlike other 
products and services, are usually customized and privately negotiated. 
Thus, for continued growth the trust of both the depositors and shareholders 
are equally important for the banks. The depositors support loans and 
advances (Credit Portfolio), and the shareholders support the Capital 
Adequacy. In many cases a customer can be both a depositor and a borrower. 
They expect lower interest for loans and advances and higher rates of interest 
 
 
103 
Global Perspective: 
Basel Framework 
 
Evolution and Growth 
of Corporate 
Governance in Indian 
Banking 
on deposits. Good governance makes it possible to enhance the trust of the 
depositors, shareholders, and efficient running of the banks.  
Signs of good corporate governance: Citing from the United Nations 
Economic and Social Commission for Asia and the pacific (UNESCAP), the 
concept of good governance has eight principles. 1. Participation, 2. Rule of 
law, 3. Transparency, 4. Responsiveness, 5. Consensus oriented, 6. Equity 
and inclusiveness, 7. Effectiveness and efficiency, 8. Accountability. The 
broad categories of good corporate governance are as follows:   
Commitment to Corporate Governance 
? Board takes responsibility for CG 
? CG is regularly reviewed, and improvements are planned 
? Appropriate resources are committed 
? Policies and procedures are formalized and distributed to the concerned 
staff 
? CG code and/or guidelines are developed or followed 
Good board practices 
? Board role and authority are clearly defined 
? Duties and responsibilities of directors are understood 
? Board is well structured 
? Board has an appropriate composition and mix of skills 
? Appropriate board procedures are in place 
? Director remunerations are in line with best practices 
? Board self-evaluation and training are conducted 
Appropriate Control Environment 
? Independent audit committee established 
? Risk management framework /structure is present 
? Internal control procedures are in place 
? Independent external auditor conducts regular audits 
? Management information systems are established 
Disclosure and Transparency 
? Financial information as well as non-financial information is disclosed 
? Financials are prepared as per the standards prescribed 
? Timely and quality annual reports are published on time 
? Web-based disclosure is made and investors site on the web is created 
 
 
 
104 
Corporate Governance 
in Banking 
Shareholder Rights 
? Minority shareholder rights are formalized and protected 
? Annual General Meetings (AGMs) are conducted and well organized 
? Related party transactions, policies are in place 
? Dividend policies are precise and clearly defined 
6.3 INTERNATIONAL PERSPECTIVES OF 
CORPORATE GOVERNANCE 
Governance is a process of governing or overseeing the control and direction 
of something (such as a country or an organization). According to Cadbury 
Committee,1992 relating it to the corporate world, it is understood as “the 
system by which companies are directed and controlled”. It has further been 
explained in the Organization for Economic Co-operation and Development 
(OECD Principles of Corporate Governance (2004) as “a global agreement 
about the immense importance of good Corporate Governance in contributing 
to the economic growth and stability viz. the rules and practices that govern 
the relationship between the managers and shareholders of the corporations, 
as well as other stakeholders like employees and creditors”. 
The growth of CG across the globe can be attributed to various corporate 
debacles which crippled the economic systems of the world. Some of the 
failures of banks are shown below: 
1) Failure of Barings Bank (1995) 
By losing billions of dollars due to unauthorized trades in Singapore 
Exchange (SGX). The rogue trader Nick Leeson’s losses accounted for 
827 million Pounds twice Barings Bank’s available trading capital. Bank 
declared bankruptcy in 1995. Internal controls were lax where Nick 
Leeson’s bosses had given him a free hand to trade without any proper 
supervision. 
2) Asian Financial Crisis (1997–1998) 
The Asian financial crisis of 1997–98 was triggered by massive reversals 
of capital flows and contagion. Though deeper, structural causes of crises 
vary, there were common factors across crisis-affected countries. 
Domestic financial firms that were inadequately regulated and 
supervised over-borrowed from abroad and over-extended loans to 
domestic corporations and projects of dubious credit quality. 
Furthermore, a currency crisis that initially was benign, evolved into a 
full-blown economic crisis due to the mutually reinforcing impacts of 
currency depreciation, financial sector deterioration, and corporate sector 
distress. The crisis was the result of interactions between the forces of 
financial globalization and domestic structural weakness.