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The banking scenario in India is changing fast to keep pace with the
international banking practice. As a result, the banks in India have been asked to
meet specific standards such as capital adequacy norms, classification of assets
and income recognition Norms etc.
The main objective of this project is to introduce about the corporate
governance and how the corporate governance workout in the Indian Banking
Sector. This project would also provide fundamental concepts to understand
about the corporate governance and Indian Banking System. The project covers
emergence of the concept of corporate governance, the manner in which it is
relates with banking sector, its various issues, constituents and how it is being
implemented in the banking sector. The focuses mainly on some specific
aspects of codes of corporate governance and is application in the banking
Though outcomes of good corporate governance remains same
irrespective of nature of business, type of ownership, quality of management,
business/legal regulations, and political environment, but the means to achieve
this good governance differs a lot based on the factors mentioned above. Some
of the parameters that may influence corporate governance include ownership
structure, board philosophy, industry segment, and maturity of business,
management process, level of competition, international business participation,
Lot of effort is being put both nationally and internationally in understanding
and suggesting good practices that can improve governance of banking sector.
In India also several initiatives have been taken up in understanding nuances of
banking sector governance.

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Corporate Governance has become one of the most commonly used phrases
in the current global business vocabulary. This raises the question, is corporate
governance is a vital component of successful business or is it simply another
fad that will fade away over time? Nations around the world are instigating far
reaching programmers for corporate governance reform, as evidenced by the
proliferation of corporate governance codes and policy documents, voluntary
and mandatory, both at the national and supranational level. We believe that the
present focus on corporate governance will be maintained into the future and
that, over time, corporate governance issues will grow in importance, rather
than fade into insignificance. The phenomenal growth of interest in corporate
governance has been accompanied by a growing body of academic research.
Modern business world demands quality, ethics and excellence, properly
injected into the organization at the level of person, process and product [PPP].
To cope with this change core competency is identified and leveraged for
success and all this is made possible through corporate governance. Corporate
Governance is an instrument for strengthening the overall effectiveness of
corporate enterprise in thecorporate world and helps to optimize the goals
of corporate entities within the boundary of corporate environment. It is an
important component in a long term perspectives of companies and has a
leading species of large genus namely, National Governance, Human
Governance, Societal Governance, Economic Governance and Political
Corporate Governance includes the policies and procedures, which is
usually adopted by a company in achieving its objectives in relation to its
shareholders, employees, customers and suppliers, regular authorities and
community at large. Corporate Governance usually establishes a structural
framework, which makes a healthy and competitive company with self
clearing and competitiveness by some strategies, transparency, motivation and
social orientation. Corporate Governance plays an integral part to the very
existence of a company/ organization/ Banking Sector/ Corporate Entity. It
inspires and strengthens investors confidence by insuring companys
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commitment to higher grow and profits [ICSI, 2003]. The further need of
corporate governance includes: Protecting the rights of shareholders, making
confidence among the stakeholders, strengthening the Board of Directors,
providing autonomy and responsibility to the Board of Directors, providing
protection to the financial and other lending institution, and to keep
sustainability economic, environment and social. Corporate Governance is a
means of overcoming these problems, as it seeks to minimize the malpractices
by the companies by establishing the system, where more information about the
transactions of the companies or decisions taken by the management is available
to the shareholders and the public. In a corporate governance system, Board of
Director is the sole authority for merging the companies.


Corporate governance is a field in economics that investigates how to

secure/motivate efficient management of corporations by the use of incentive
mechanisms, such as contracts, organizational design and legislation. This is
often limited to the question of improving financial performance, for example,
how the corporate owners can secure that the corporate managers will deliver a
competitive rate of return,., mathiesen [2002].
Corporate governance deals with the way in which supplier of finance to
corporation assure themselves of getting a return on their investment, the
journal of Finance Shleifer and vishny [1997]
Corporate governance is the system by which business corporations are
directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the
corporations, such as, the board, the managers, shareholders and the other
stakeholders, spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it also provides the structure through which the
companies objectives are set, and the means of attaining those objectives and
monitoring performance, OECD, April 1999.
Corporate governance is about promoting corporate fairness,
transparency and accountability. Wolfensohn, President of World Bank.
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Corporate Governance is concern with the values, vision, visibility

(VVV). It is about the value orientation of the organization, ethical norms for its
performance, direction of development and social accomplishment of the
organization and the visibility of its performance and practices. In Indian
banking sector the corporate governance takes more vital role for their
governance and growth. Due to Liberalization, Privatization, Globalization and
Information Technology currently changing Indian Banking radically, corporate
governance takes more crucial role for their framework. Corporate governance
of banks is an essential element of a countys governance architecture. It can
have systematic financial stability implication and shape the pattern of credit
distribution and overall supply of financial services. Hence the necessity and
importance of enforcing effective corporate governance in the banking sector.

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Role and powers of Board
Good governance is decisively the manifestation of personal beliefs and
values which configure the organizational values, beliefs and actions of its
Board. The Board as a main functionary is primarily responsible to ensure value
creation for its stakeholders. The absence of clearly designated roles and powers
of Board weakens accountability mechanism and threatens the achievements of
organizational goals. Therefore, the foremost requirement of good governance is
the clear identification of powers, roles, responsibilities and accountability of
the Board, CEO, and the chairman of the Board. The role of the Board should
be clearly documented in a Board Charter.

Clear and unambiguous legislation and regulations are fundamental to
effective corporate governance. Legislation that requires continuing legal
interpretation or is difficult to interpret on a day-to-day basis can be subject to
deliberate manipulation or inadvertent misinterpretation.

Management environment
Management environment includes setting-up of clear objectives and
appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment,
having right people and right skills for the jobs, establishing clear boundaries
for acceptable behavior, establishing performance evaluation measures and
evaluating performance and sufficiently recognizing individual and group

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Board skills
To be able to undertake its functions efficiently and effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience.
Each of the directors should make quality contribution. A board should have the
following skills, knowledge and experience. Operational or technical expertise,
commitment to establish leadership, financial skills, legal skills and knowledge
of government and regulatory requirement.

Board appointments
To ensure that the most competent people are appointed in the board, the
board position should be filled through the process of extensive search. A welldefined and open procedure must be in place for reappointments as well as for
appointment of new directors. Appointment mechanism should satisfy all
statutory and administrative requirements. High on the priority should be an
understanding of skill requirements of the Board particularly at the time of
making a choice for appointing a new director. All new directors should be
provided with a letter of appointment setting out in detail their duties and

Board induction and training

Directors must have a broad understanding of the area of operation of the
companys business, corporate strategies and challenges being faced by the
Board. Attendance at continuing education and professional development
programs is essential to ensure that directors remain abreast of all
developments, which are or may impact on their corporate governance and other
related duties.

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Board independence
Independent Board is essential for sound corporate governance. This goal
may be achieved by associating sufficient number of independent directors with
the Board. Independence of directors would ensure that there are no actual or
perceived conflicts of interest. It also ensures that the Board is effective in
supervising and, where necessary, challenging the activities of management.
The Board need to be capable of assessing the performance of managers with an
objective perspective. Accordingly, the majority of Board members should be
independent of both the management team and any commercial dealing with the

Board meetings
Directors must devote sufficient time and give due attention to meet their
obligations. Attending Board meetings regularly and preparing thoroughly
before entering the board room increases the quality of interaction at board
meetings. The Board meetings are the forums for Board decision-making. These
meetings enable directors to discharge their responsibilities. The effectiveness
of Board meetings is dependent on carefully planned agendas and providing
relevant papers and materials to directors sufficiently prior to Board meetings.
Also in the present scenario, Board meeting through modern means of
communication like tele-conferencing, video conferencing may be expressly
allowed under law.

Board Resources
Board members should have sufficient resources to enable them to
discharge their duties effectively. It includes an access for director to
independent legal and professional advice at the companys expense. The cost
of supporting the Board should be transparent and reported.

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Code of conduct
It is essential that the organizations explicitly prescribe norms of ethical
practices and codes of conduct are communicated to all stakeholders and are
clearly understood and followed by each member of the organization. Systems
should be in place to periodically measure, evaluate and if possible recognize
the adherence to code of conduct.

Strategy setting
The objectives of the company must be clearly documented in a longterm corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.
Business and community obligation
Though basic activity of business entity is inherently commercial yet it
must also take care of communitys obligations. Commercial objectives and
community service obligation should be clearly documented after approval by
the Board. The stakeholders must be informed about the proposed and on-going
initiatives taken to meet the community obligations.

Financial and operational reporting

The Board requires comprehensive, regular, reliable, timely, correct and
relevant information in a formand of a quality that is appropriate to discharge its
functions of monitoring corporate performance. For this purpose, clearly
defined performance measures-financial and non-financial should be prescribed
which would add to the efficiency and effectiveness of the organization. The
reports and information provided by the management must be comprehensive
but not so extensive and detailed has to hamper comprehension of the key
issues. The report should be available to Board members well in advance to
allow inform decision-making. Reporting should include status report about the
state of implementation to facilitate the monitoring of the progress of all
significant Board approved initiatives.

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Monitoring the Board performance

The Board must monitor and evaluate its combined performance and also
that of individual directors at periodic intervals, using key performance
indicator beside peer review. The Board should establish an appropriate
mechanism for reporting the results of Boards performance evaluation results.

Audit committees
Audit committee is an inter alia responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of internal
control and compliance with significant policies and procedures, reporting to
the Board on the key issues. The quality of audit committee significantly
contributes to the governance of the company.
Risk management
Risk is an important element of corporate functioning and governance.
There should be a clearly established process of identifying, analyzing and
treating risks, which could prevent the company from effectively achieving its
objectives. It also involves establishing a link between risk-return and
resourcing priorities. Appropriate control procedures in the form of risk
management plan must be put in place to manage risk throughout the
organization. The plan should cover activities as diverse as review of operating
performance, effective use of information technology, contracting out and
outsourcing. The Board has the ultimate responsibility for identifying major
risks to the organization, setting acceptable level of risk and ensuring that the
senior management has taken steps to detect, monitor and these risks. The
Board must satisfying itself that appropriate risk management system and
procedure are in place to identify and manage risks. For this purpose, the
company should subject itself to periodic external and internal risk reviews.

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There is complete uniformity now in the banking industry and the system
therefore ensures responsibility and accountability on the part of the
management in proper accounting of income as well as loan impairment. At the
initiative of the regulators, banks were quickly required to address the need for
Asset Liability Management followed by risk management practices. Both these
are critical areas for an effective oversight by the Board and the senior
management which are implemented by the Indian banking system on a tight
time frame and the implementation review by RBI. These steps have enabled
banks to understand measure and anticipate the impact of the interest rate risk
and liquidity risk, which in deregulated environment is gaining importance.
Prudential norms in terms of income recognition, asset classification, and
capital adequacy have been well assimilated by the Indian banking system. In
keeping with the international best practice, starting 31st March 2004, banks
have adopted 90 days norm for classification of NPAs. In addition, norms
governing provisioning requirements in respect of doubtful assets have been
made more stringent in a phased manner. Beginning 2005, banks will be
required to set aside capital charge for market risk on their trading portfolio of
government investments, which was earlier virtually exempt from market risk
requirement. All the Indian banks barring one today are well above the
stipulated benchmark of 9 per cent and remain in a state of preparedness to
achieve the best standards of CRAR as soon as the new Basel 2 norms are made
operational. Reserve Bank of India has taken various steps furthering corporate
governance in the Indian Banking System. These can broadly be classified into
the following three categories: Transparency, Off-site surveillance and Prompt
corrective action. However, there are many gaps in the disclosures in India vis-vis the international standards, particularly in the area of risk management
strategies and risk parameters, risk concentrations, performance measures,
component of capital structure, etc. Hence, the disclosure standards need to be
further broad-based in consonance with improvements in the capability of
market players to analyze the information objectively. The off-site surveillance
mechanism is also active in monitoring the movement of assets, its impact on
capital adequacy and overall efficiency and adequacy of managerial practices in
banks. RBI also brings out the periodic data on Peer Group Comparison on
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critical ratios to maintain peer pressure for better performance and governance.
There are three major challenges facing governance ratings in India: Firstly
there does not seem to be a clear objective in relation to the capital markets. The
second challenge is that there is insufficient accumulated knowledge on
corporate governance and a great amount of fluidity in the theory at present and
the third challenge is to assign weightings to the companies in the context of
global markets. The rating agencies need to reflect on these while the regulator
refrains from putting pressure to initiate a rating system for corporate
The RBI Advisory Committee on Corporate Governance has defined
Corporate Governance as the system by which business entities are monitored,
managed and controlled. The Board of Directors occupies a pivotal place in the
scheme of Corporate Governance. The advisory group on banking supervision
has emphasized the need for enhanced transparency and disclosures in respect
of various aspects of boards constitution and functioning. Beginning with the
composition of the Board of Directors and elaborating their various functions
and duties, the corporate governance code prescribes the procedures that make
the functioning of Board more effective. These are:
1. As representatives of various stakeholders, it is the moral responsibility
of Board of Directors to ensure that the company does not undermine
moral and ethical issues in the lure of profits.
2. It is imperative for the Board to keep itself aware of the happenings in the
company rather than performing perfunctory duties.
3. Through its various committees, the board should keep its fingers on the
pulse of the activities besides inspecting the activity of the company. The
audit committee, compensation committee, nominations committee,
credit committee, risk management committee are the various sub-groups
of the board that ensure that the company sticks to the corporate
governance mechanisms.
4. The Board is accountable for the action of the company. It act as a
governing body that controls and channelizes the resources into
productive and morally right ways. It is the responsibility of the Board to
ensure that proper governance practices are in place in the company. It
has to keep track of the going on in the company through active
involvement at the strategic and policy-making levels.

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5. The existence of outside independent directors enables the board to make

an objective evaluation of companys activities. Their position as
members of the board gives them access to information which will not be
otherwise available to outsiders. The independent directors are in a better
position to stipulate a course of action. To increase the effectiveness of
directors some of the experts have suggested the insurance of these
directors for the risk they take in providing guidance or taking certain
6. The board has the duty to ensure that the management performs its duties
with regard to day-to-day affairs within legal, moral and ethical bounds.
7. Board is not to act as a kind of director. It should set goals for itself and
evaluate its performance. It will set an example for other to follow.
8. Board should be broad based. The directors should bring independent
judgment to bear on issues of strategy, performance, resource planning
and standards of conduct. They should be conversant with the banking
9. The board should have following committees, namely, audit committee,
compensation committee, nominations committee, credit committee, risk
management committee.
10.There should be an agreed procedure for directors to seek professional
advice where considered necessary.

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Banks and development financial institutions of India, particularly DFIs
have important role in governance of companies and where they have their
nominee directors. The role of these nominee directors is to protect the interest
of the institution and also as a member of the board be responsible as any other
director. However, in certain instances where irregularities have been detected,
the role of nominee directors has attracted attention. however, it is felt in
general that theses nominee directors have a duty to act in the larger public
interest. Banking is clearly a very special sub-set of corporate governance with
much of its management obligations enshrined in law or regulatory codes.
Governance is also a curiously two-side issue for banks since their funding and,
often, ownership of other companies makes them a significant stakeholder in
their own right. Governance in bank is a considerably more complex issue than

Most countries including members of the International Monitory Fund

[IMF]have experienced problems within their Banking community from
time to time. The fact that these problems can still occur after the
introduction and indeed implementation of both national and international
standards and regulation gives the subject of corporate governance of
banks crucial importance.


It is necessary to have a clear idea, to anyone in financial management,

whether micro or macro and interest in good market practice that banks
are extremely important for development of a successful economy;
indeed the corporate governance of such institution is integral to that

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Banks are in unique position of effectively collecting a allowing the use

of fund in given manner of enterprise. Where such funds are used in
proper and consistent manner, this can lead to stable market, lower the
cost of capital and accordingly stimulate growth in an economy as whole.


Corporate Governance Guidelines to the bankers [i.e. directors and

senior management of the banks] to allocate capital efficiently, to expert
good and effective Corporate Governance in their own institutions and
also to promote good practices for their costomers. This ultimately helps
to generate built in discipline in the relations bank and their costomers.


Corporate Governance provides proper attention towards weak or

improper supervision of banks which can have the disproportionate effect
of destabilizing a countys economy and indeed reducing market


Corporate governance check on the various banking crises which are

reasons for crippling economies, destabilized governments and in a macro
sense, held back the development of less sophisticated economies and
emerging nations and this results in intensified poverty.

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Banks operates in a different manner to generate corporation in the

delivery of their business and their position in the market. Accordingly, it is

important to create, either willingly or through regulations, a degree of
transparency to allow for customer & market confidence.


Banks are generally even in emerging economy, heavily regulated when

compared toother corporations.


Banks have:

A wide definition of stakeholders.

Mechanism to avoid the issue of systematic risk.
Additional regulation and compliance issues.
The interests of depositors requiring protection.
The need for strong internal control and risk management.
Particular issues of related party transaction

Corporate governance from a banking industry perspective also deals

with, among other factors the manner in which the business andattendees of
individual institutions are governed by their boarding of directory and senior
management which affects how banks:

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A] Set corporate objectives

Cadburry report is a basic foundation for all the entries to prepare the basic
norms w.r.t. corporate governance practices.
B] Run on a day to day basis.
C] Meet the obligations of accountability, both internally and externally.
D] Align corporate activity and behavior.
E] Protect the interests of depositors and other customers.

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Series of efforts being made by two independent regulatory bodies in a
last few years to accomplish harmonism of regulations policies and guidelines
made applicable to the regulated entities. RBI has advised, on the suggestion
from the SEBI that the Indian commercial banks (both public & private sector).
Which are listed on the stock exchanges should adopt the guidelines of SEBI
committees on corporate governance. They are as follows:

Optimum combination of executive and non-executive directors in the


Pecuniary relationship or transactions of the non executives directors vis-

-vis the bank.


Independent adult committees, their constitutions, chairmanship, power,

role &responsibilities conduct of business etc


Remuneration of directors,


Periodicity/ no. of board meetings


Disclosure by management to the board about the conflict of interest.


Information/ reappointments of directors, display the quarterly results/

presentations to analysis on websites.


Maintenances of office by non-executive chairman


reviewing with the management by the audit committee of the board the

annual financial statement before submission to the board, focusingprimarily

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Any changes in accounting policies and practices

Major accounting entities based on exercise the judgement of
Qualifications in draft audit report
Significance adjustments arising out of audit compliance with standards
The going concern assumptions.

The audit committee of the board may look into the reasons for default in

payments to deposits debenture shareholders (non payment of dividend) &

creditors wherever there are cases of default s in payment.
SEBIcommittees recommendations on other additional functions to be
interested to the audit committee complied with by the listed banks as per listing

As regards the appointment and removal external auditors, the practice

followed in banks is more stringent that the recommendations of the committee

and hence will continue as it is.

With the view to further improve corporate governance standards in

banks, the following new measures are recommended:

A] In the interest of the stakeholders, the private sector and public sector banks
which have issued shares to the public may form committees on the same lines
as listed companies under the chairmanship of non- executive director to look
into redressal of shareholders complaints.
B] All listed banks may provide in audited financial results on half yearly banks
to their shareholders with summary of significant development.

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In todays competitive business world the businessmen have to deal with
several stake holders, one of them is customers. Corporate needs to think
carefully about their approach to customer service and make sure about its
awareness about customers legal rights. Proper respect towards customers
rights helps the corporate to build a good reputation and can retain their custom.

Customers key rights when buying or hiring goods

Businessmen or entrepreneurs must provide proper attention towards

following rights:
The goods must match the description which company or business gives
to them for example, if you say a computer has an 80 GB hard drive it
cant be 40 GB.
The goods must be of satisfactory quality- It means they must be of a
standard that any reasonable person would regard as satisfactory. They
should be safe, work properly, and have no defects in their appearance or
The goods must be fit for the purpose specified. It says that, they should
be capable of doing what they are meant for. For example, a watch
should tell the time and if the customer said they wanted to use it while
swimming and you didnt say it was unsuitable, it should be able to
perform this task.

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Customers rights to reject goods and claim refunds.

If customersbelief that goods hired or purchased from businessman is not

as described fit for their purpose, or of satisfactory quality, they can reject them.
Except where they are hiring or purchasing in the course of business and the
fault is so slight it would be unreasonable to do so.


Customers key rights when buying services:

The customer is entitled to the service defined in the contract you make
with them.
According to supply of goods and services Act every business must have
to carry out work with reasonable skill and care. Provide the service
within reasonable amount of time and at reasonable price.
There should not be any discrimination among customer on any grounds.


Customers rights with credit and financial product and services

Customers can make a claim against both the supplier and the credit
provider for faulty goods.
Since 1 Oct. 2008, every business has to provide regular statements
during the lifetime of the credit agreement.

Protection of consumers against different unethical practices


1. Bid rigging
2. Dumping
3. Predatory pricing
4. Price discrimination
5. Price fixing
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1. Inferior quality
2. Adulteration
3. Faulty weight
4. Defective


1. Lengthy supply chain
2. Share of commission of every distribution agent in price of the
3. Hoarding


1. Misleading advertisement
2. Fake offers
3. Wrong information by salesperson
Under the consumer protection act 1986, a consumer or customer is
guaranteed following rights:
a) Rights to be protected against the marketing of goods and services which
are hazardous to life and property.
b) Right to be informed about the quality, quantity, potency, purity, standard
and price of goods and services.
c) Right to be assured.
d) Right to be heard.
e) Right to seek redressal against unfair trade practices.
f) Right to consumer protection.
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The Advantages of Corporate Governance in


The potential of Corporate Governance to propel a business to greater

commercial success is not generally well known. When you speak to those in
business about how Corporate Governance works, you often get vague
responses relating to policy, systems and processes that are established in an
organization. But that explanation does not do justice to the subject of
Corporate Governance. If a business is determined to grow (especially in the
current lack luster business environment) then they should seriously think about
introducing proper Governance into their organization.
1. Role clarity for the owners and management team
Governance permits managers and owners to delineate their roles and
separate the issues of ownership (shareholding) from the management of
the business. This usually facilitates faster decision making as it allows
managers and owners to choose which hat to wear depending on the
issue or matter at hand.
2. Purposeful strategic direction
Corporate Governance relies on the company defining and following a
definitive strategic direction. This enables the owners and/or management
to apply the right resources to the most beneficial opportunities. In turn
this typically leads to the quicker achievement of company goals, while
minimizing wasted resources on less important activities.

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3. Retention of staff
Motivation increases when employees/staff are part of a business that has
a well-defined and communicated vision and direction. This can improve
staff retention which can become especially important when it comes to
attracting and retaining senior talent.
4. Improved relationships with the bank
Corporate Governance enables robust and regular financial and
management reporting. The resulting systematic approach to producing
data will foster confidence in your business from your funders/banks as
well as your investors. Improved access to capital can be another flow-on
benefit from sound Corporate Governance.
5. Improvement in profitability
Governance often leads to improved reporting on performance. This
means managers and owners are better equipped to make higher quality
decisions that can drive an increase in sales and margins and a reduction
in costs

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There are several reasons for the absence of sufficient corporate governance
mechanism in the Indian banking sector:
1. Multiplicity of regulations:
Banks are governed by multiple enactments. For instance, private banks
are governed both by the companies Act, 1956 and the banking
companies regulation Act and Bank nationalization Act, 1969 [amended
in 1982]. The state Bank of India and its associates are governed by the
state Bank of India Act, 1955 [amended in 1997]. The Regional Rural
Banks are regulated by RRB Act, 1975, the co-operative banks by
cooperative banking regulation Act, 1949 and Banking Laws [cooperative
societies] Act, 1965. The RBI advisory group has opined that all the
banks should be brought within the purview of a single act which
prescribes the various practices to be followed by one and all.

2. Lack of synchronization among various corporate various corporate

governance norms:
Three different committees in India have dealt with the subject of
corporate governance. These are: the Kumar Mangalam Birla committee
report, 2000 that had been constituted by SEBI; CH Report, 1998 and the
RBI Advisory Committee Report, 2001. There is no synchronization of
the regulations. Each Report has dwelt on specific issues. It would be
better if a common code is prescribed after harmonizing the
recommendations of various committees.

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3. Qualitative V. Quantitative:
Banking norms are quantitative the Qualitative. Governance depends
more on quality of adherence to the norms in addition to quantitative

4. Mix-up between ownership role and regulatory role:

In most of the financial institutions, the RBI has been a majority
shareholder as well as regulator. Narsimhan committee on banking
reforms raised the question as to whether regulator should be owners in
the context of State Bank of India. Recently RBI has vacated its majority
ownership role in Securities Trading Corporation of India Ltd. And
discount and Finance House of India and is in the process of divestment.
There is also no justification for a regulator like RBI to be represented on
the board of those regulated.

5. Mismatch







representation: previously, when government used to be the majority

shareholder in many of the financial institutions, it could have a majority
representation on its board. With diversified ownership, private
shareholders have begun to be given board level representation. But
private shareholders representation is not commensurate with the extent
of their shareholding. For instance, even with the 40 per cent
shareholding private shareholders representation on the board may not
exceed 10 to 15 per cent of the total board membership.

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6. Lackof transparency in selection of board members:

It is anybodys guess as to what are the considerations that weigh in
governments mind in making board level appointments. To have truly
professional directors, there should be a process of transparent search.

7. Board accountability:
Accountability of directors in public sector banks is another aspect on
which processes have to be put in the place. Directors must be made
aware as to what they are expected to do on the board. Their actual
performance should be monitored and kept in view while reappointing

8. Lack of timely appointment of directors:

sometimes, it takes a number of years for the government to reconstitute
the board of some of the public sector banks.

9. Political boards:
Very often, board level appointments in financial institutions are based on
political considerations. Board appointments must remain stable and
unaffected by political developments. In many cases, whole of the board
has got replaced overnight.

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Corporate Governance in Indian Bank Case Study: State Bank of
The issue of corporate governance has come up mainly in the wake up of
economic reforms characterized by liberalization and deregulation. According
to OECD, the corporate governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation, such as, the
board, managers, shareholders and other stakeholders and it also spells out the
rules and procedures for making decisions on corporate affairs. Corporate
governance is exclusively of board of directors in a manner that it becomes a
way of organizational life and not merely written rules or regulations or code of
ethics. Ethics and transparency are cardinals of corporate governance.

The seeds of modern corporate governance were probably sown by the
Watergate scandal in the USA. Subsequent investigations by US regulatory and
legislative bodies highlighted control failures that had allowed several major
corporations to make illegal political contributions and bribe government
officials. While these developments in the US stimulated debate in the UK, a
spate of scandals and collapses in that country in the late 1980s and early 1990s
led shareholders and banks to worry about their investments. Several companies
in UK which saw explosive growth in earnings in the 1980s ended the decade in
a memorably disastrous manner. In May 1991, the London Stock Exchange set
up a committee under the chairmanship of Sir Arian Cadbury to help raise the
standards of corporate governance and the level of confidence in financial
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reporting and auditing by setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is expected of them. The
committee investigated accountability of the board of directors to shareholders
and to the society. It submitted its report and the associated code of best
practices in December 1992 wherein it spelt out the methods of governance
needed to achieve a balance between the essential powers of the board of
directors and their proper accountability. Contemporary corporate governance
started in 1992 with the Cadbury report in the UK. Cadbury was the result of
several high profile company collapses and was concerned primarily with
protecting weak and widely dispersed shareholders against self-interested
directors and managers.
The corporate governance initiative in India was not triggered by any
serious nationwide financial, banking and economic collapse. The initiative in
India was driven by The Confederation of Indian Industry. In December 1995,
CII set up a task force to design a voluntary code of corporate governance. The
final draft of this code was widely circulated in 1997. In April 1998, the code
was released. It was called Desirable Corporate Governance: A Code.
Following CIIs initiative, the Securities and Exchange Board of India (SEBI)
set up a committee under Kumar Mangalam Birla to design a mandatory-cumrecommendatory code for listed companies. The Birla Committee Report
submitted in February 2000 and it was approved by SEBI in December 2000.
The report became mandatory for listed companies through the listing
agreement and implemented according to a rollout plan. Following CII and
SEBI, the Department of Company Affairs (DCA) modified the companies Act
1956, to incorporate specific corporate governance provisions regarding
independent directors and audit committees.

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The objective of the research paper is to evaluate the corporate governance
practice in banking sector through a case study of the State Bank of India. For
evaluation purpose, this research paper divided into two parts. Based on
different elements of and with the help of secondary data, this work has
analyzed and evaluated the practice of corporate governance in State Bank of
India. In the first part, the concepts of corporate governance like evolution of
corporate governance in world and Indian scenario, role and importance of
corporate governance in banking sector has been discussed. The second part
analyses the practice of corporate governance as determined in State Bank of
India with the help of elements like board practices, stakeholders and
transparent disclosure of information.
The corporate governance practice is important for banks in India 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. Further, with
restrictive support available from the government for further capitalization of
banks, many banks may have to go for public issues, leading to
transformation of ownership.

The banks form an integral part of the

economy of the country and any failure in a bank might have a direct bearing
on the financial health of the country. The Basel committee on banking
supervisory authorities was established by the Central Bank Governors of the
G10 developed countries in 1975. The Basel committee in the year 1999 had
brought out certain important principles on corporate governance for
banking organizations which, more or less have been adopted in India. The
minimum impact of recession on Indian economy was because of strong and
effective nature of banking sector in India.

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State Bank of India is the countrys largest commercial bank in terms of
profits, assets, deposits, branches and employees. With over 200 years of
existence, State Bank group has a presence in 33 countries and extensive
network of more than 18,000 branches and 26,000 plus ATMs and 100 million
accounts across the country. The only Indian Bank to feature in the Fortune 500
list, SBI has 5 Associate banks and 7 Subsidiaries arguably the largest in the
world. With millions of customers across the country, SBI offers a complete
range of banking products and services with cutting edge technology and
innovative banking model. State Bank of India is committed to the best
practices in the area of corporate governance. The sound corporate governance
practice in State Bank of India would lead to effective and more meaningful
supervision and could contribute to a collaborative working relationship
between bank management and bank supervisors. Based on different elements
like boards practices, stakeholders services and transparent disclosure of
information the practice of corporate governance in state bank of India was

Central Board

The central board of directors was constituted according to

the SBI Act 1955. The banks central board draws its powers from and carries
out its functions in compliance with the provisions of State Bank of India Act &
Regulations 1955. Its major roles include, among others, overseeing the risk
profile of the bank; monitoring the integrity of its business and control
mechanisms; ensuring expert management, and maximizing the interests of its
stakeholders. The central board has constituted seven board level committees.

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7.1. Audit Committee of the Board: ACB provides direction as well as

oversees the operation of the total audit function in the bank. Total audit
function implies the organizational, operational, quality control of internal audit
and inspection within the bank, follow-up on the statutory audit and compliance
with RBI inspection. It also appoints statutory auditors of the bank and reviews
their performance from time to time.ACB reviews the banks financial, risk
management, IS audit policies and accounting policies of the bank to ensure
greater transparency.
7.2. Risk Management Committee of the Board: RMCB was constituted to
oversee the policy and strategy for integrated risk management relating to credit
risk, market risk and operational risk.
7.3. Shareholders/Investors Grievance Committee of the Board : SIGCB
was formed to look into the redressal of shareholders and investors
complaints regarding transfer of shares, non-receipt of annual report, nonreceipt of interest on bonds/declared dividends, etc.
7.4. Special Committee of the Board for Monitoring of Large Value
Frauds: The major functions of the committee are to monitor and review all
large value frauds with a view to identifying systemic lacunae, if any, reasons
for delay in detection and reporting, monitoring progress of CBI / Police
investigation, recovery position and reviewing the efficacy of remedial action
taken to prevent recurrence of frauds.
7.5. Customer Service Committee of the Board: CSCB was constituted to
bring about ongoing improvements on a continuous basis in the quality of
customer service provided by the bank.

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7.6. IT Strategy Committee of the Board: With a view to tracking the

progress of the banks IT initiatives, the SBIs central board constituted a
technology committee of the board. The committee has played a strategic role in
the banks technology domain.
7.7. Remuneration Committee of the Board: It was constituted for evaluating
the performance of whole time directors of the bank in connection with the
payment of incentives, as per the scheme advised by Government of India. It is
found that in SBI, these committees are providing effective professional support
in the conduct of board level business in key areas.
The SBI strongly believes that all stakeholders should have access to
complete information on its activities, performance and product initiatives.
8.1. Shareholders: The SBI is providing different types of services and
facilities to the shareholders. Share transfers in Physical form are processed and
returned to the shareholders within stipulated time. SBI has the distinction of
making uninterrupted dividend payment to the shareholders at an increasing rate
for many years. In accordance with the SEBI guidelines on green initiative in
corporate governance, SBI is issuing annual report in electronic form to
shareholders who opt for receiving the same in electronic form through their emails. To meet various requirements of the investors regarding their holdings,
the Bank has a full-fledged department i.e. shares and bonds department and
shares and bonds cells at the 14 local head offices.
8.2. Customers: With a large network and number of branches throughout
India and abroad SBI is providing different types of services and facilities to the

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8.2.1 ATMs: State Bank group has in its stable, variants of ATMs. The number
of ATMs of the SBI group was 25,005 in March 2011 and they increased to
27,286 in March 2012. The number of ATMs of SBI was 20,084 in 2011 and
they are 22,141 in 2012. The total debit cards issued by SBI were 728 lakhs in
2011 and they increased to 910 lakhs in 2012.

8.2.2 Mobile Banking: There were 10.13 lakh registered mobile customers in
2011 and they increased to 36.45 lakhs in 2012. The customers were using the
service with more than 1.20 lakhs daily transactions, around 46% of which are
financial transactions amounting to Rs. 2.45 crores. SBI has launched mobile
technology based prepaid payment services under the brand name of State Bank
Mobi Cash.
8.2.3 Internet Banking: Internet banking service is available through for both retail and corporate customers of the bank. The
number of customers in March 2011 was 62.57
8.2.3 Lakhs in March 2012. The number of transactions during 2010-2011 was
1437.46 lakhs and in 2011-12 it increased to 2610.32 lakhs.
8.2.4 Foreign Offices: The SBI is operating 173 branches in 34 countries,
including 2 OBUs in India to run their operations on a common banking
applications software, with their databases connected to a central data centre
backed up by a synchronized disaster recovery site. All foreign offices use
internet banking channel and 130 ATMs at various locations abroad cater to the
banks overseas customers with most of the ATMs connected to the centralized
ATM switch in India.

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8.2.5 Customer Complaints: The number of complaints received from the

customers during the year 2010-11 was 30,904 and they increased to 462,381
during 2011-12.
8.3. Employees: The SBI had a total permanent staff strength of 2,15,481 in the
March, 2012. Of this, 80,404 (37.32%) were officers, 95,715(44.42%) were
clerical staff and the remaining 39,362 (18.26%) were sub-staff. It has been
decided to recruit 9500 new clerical staff during the year 2012-13 to meet the
growing business needs of the bank. The SBI has transferred Rs. 49,518 crores
to the SBI employees pension fund trust from the special provision account,
during the year 2011-12. An amount of Rs. 4531.83 crores is recognized as an
expense towards the provident fund scheme of the bank. The bank has
implemented a defined contribution pension scheme (DCPS). The contributions
of the bank of Rs. 452.47 crores have been retained as a deposit with the bank
and earn interest at the same rate as that of the current account of provident
fund. An amount of Rs. 4531.33 crores (previous year 4775.74 crores) is
provided towards long term employee benefits.
8.4. Society: The executive committee of the central board has approved a
comprehensive policy for corporate social responsibility in August 2011.
During the year 2011-12 the SBI has spent Rs. 71.18 crores for various social
service activities like supporting education (Rs. 35.33 crores), Healthcare (Rs.
15.03 crores) and donations (Rs. 5.50 crores).

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Disclosure and transparency are the important pillars of a corporate
governance framework enabling adequate information flow to various
stakeholders and leading to informed decisions. The SBI was implementing all
the provisions of corporate governance and disclosure in the important and
confidential information. Table 1 shows confidential information of SBI as a
part of transparent disclosure of information.
9.1 Primary Business Segment Information of SBI
In the primary segment the treasury segment includes the entire
investment portfolio and trading in foreign exchange contracts and derivative
contracts; the corporate /whole sale banking segment comprises the lending
activities of corporate accounts group, mid-corporate account group and
stressed assets management group and the retail banking segment comprises of
branches in national banking group, which primarily includes personal banking
activities including lending activities to corporate customers. This segment also
includes agency business and ATMs.

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Table: 1 SBI Primary / Geographic Business Segments during 2011-12 (Rs. In


1.Primary Business Segment

2.Geographic Segments
































(3,10,524) (3,81,320) (5,22,699) (10,82,387) (1,41,348) (12,14,544)




(1,62,149) (3,67,495) (5,85,015) (10,17,401) (1,41,348) (11,14,659)






Figures in brackets are for previous year.

9.2 Secondary Geographic Segments information of SBI
In this segment domestic operations are branches/ offices having
operations in India. Foreign operations are branches/offices having operations
outside India and offshore banking units having operations in India.
The table-1 explains the revenue, assets and liabilities based on primary
business segment with explaining treasury, corporate/wholesale banking and
retail banking. The geographic segment explains domestic and foreign areas
performance during 2010-11 and 2011-12.
9.3 Earnings per share of SBI
The basic earnings per share are computed by dividing the net profit after tax
by the weighted average number of equity shares outstanding for the year. The
net profit in 2010-11 was Rs. 8264.52 crores and it increased to Rs. 11,707.29

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crores in 2011-12. Basic earnings per share in 2010-11 are Rs. 130.16 and it
increases to Rs. 184.31 in 2011-12.
9.4 Details of Different Provisions and Contingencies
The provisions and contingencies of SBI during 2011- 12 are explained in
table 2. The total provisions are Rs. 17,071.05 crores in 2010-11 and they
increased to Rs. 19,866.25 crores during 2011-12.
Table: 2 Provisions and Contingencies

(Rs. in crores)




Current Tax



Deferred Tax




on 683.28


Non-Performing Assets 11,494.10


Restructured Assets



Standard Assets






9.5 Details of Concentration of Advances, Exposures & NPAs

Information of SBI: Table 3 demonstrates the concentration of deposits,
advances, exposures and NPAs information during 2010-11 and 2011-12.
The table explains the operational weaknesses in the SBI regarding issue
of advances to twenty largest borrowers, concentration of exposure with
twenty largest borrowers and concentration of NPAs with four NPA

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Table: 3 Concentration of Advances, Exposures & NPAs (Rs. in crores)




Concentration of







Advances (Twenty
Largest Borrowers)
Concentration of
Exposures (Twenty
Largest Borrowers )
Concentration of NPAs
(Four NPA Accounts)


The study found that, the SBI is implementing all the provisions of corporate
governance according to the RBI/GOI directions. It is found that State Bank of
India, the countrys largest commercial bank, performed well in every aspect in
terms of profits, assets, deposits, branches, employees and services to
customers. The study found that the SBI conducted different board meetings
regularly to provide effective leadership, functional matters and monitors banks
It is found that the SBI established clear documentation and transparent
management processes for policy development, implementation, decisionmaking, monitoring, control and reporting. Even though the SBI is showing
good performance and implementing provisions of corporate governance, some
lapses have to be rectified for increasing the performance. The SBI is operating
nearly 10 crores of customer accounts. Among them the net banking operating
customers are 89.63 lakhs, mobile banking operating customers 36.45 lakhs,
customers using ATMs are 910 lakhs. Though the customers operating ePage | 40


banking are increasing every year, they are using e-banking for normal or
minimum services. It is suggested that consumer service committee must take
initiative steps to increase online banking services through customer awareness
programs and internet banking training programs. It decreases customers
pressure on branches and it is useful to reduce customers waiting time in all
branches. The study found that customers complains are increased during the
year 2011-12 (4, 62,381) when compared to the previous year 2010-2011
(30,904). Consumer service committee must take initiative steps to satisfactorily
address customers complaints.
The study found that, concentration of advances to twenty largest borrowers
increased from Rs. 65,236 crores in 2010-2011 to Rs. 83,199 crores in 20112012 indicating credit risk. It is suggested that the credit risk management
should take necessary steps to minimize risks.
The study found that concentration of exposures to twenty largest borrowers
has increased from Rs. 2, 07,277.40crores in 2010-11 to Rs. 2, 13,774.62 crores
in 2011-12 indicating credit risk. It is suggested that the central board should
take immediate action to reduce the concentration of exposures. It is found that
the concentration of NPAs total exposure to top four NPA accounts was Rs.
730.27 crores in 2010-11 and it is increased to Rs. 2,931.51 crores in 2011-21
indicating credit risk. It is suggested that the credit risk management should take
necessary steps to avoid this type of concentration of NPAs.

The SBI is

conducting different types of social services activities in different sectors like

education, healthcare and other areas as a part of social responsibility.
The amount spent for this purpose was Rs. 71.18 crores only. It is suggested
that the amount must be increased for social service activities to draw public
attention. Finally, this study concluded that, the corporate governance practice
in the State Bank of India should improve for best investment policies,

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appropriate internal control systems, better credit risk management, better

customer service and adequate automation in order to achieve excellence,
transparency and maximization of stakeholders value and wealth.

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The important features of the financial sector which have a bearing
on the corporate governance structure include:
1. Dominance of the public sector ownership in the financial sector whether
by bank or the development financial institutions.
2. Shift away from external micro-regulation by the RBI to the internal
With the advent of economic liberalization, the ownership pattern in
many public sector financial intermediaries is undergoing a change. The
governments are gradually reducing its stake in these institutions. It has made
many of this institution to approach the market for funding support. Before
mobilizing the public investments, they must convince prospective investors
that they are worth investing.
Many areas which require corporate governance practices in the banking
sector can be found in narasimham committee reports (committee on financial
system and committee on banking sector reform). Following suggestions
therefore may be kept in view for reforming the corporate governance system in
the Indian banking sector:
1. The board of directors, two third should be non-executive directors
and majority of them should be independent of the institutions as well
as government.
2. Of the directors, two third should be non-executive directors and
majority of them should be independent of the institutions as well as
3. Non-executive directors should be appointed for an initial term of
three years and reappointed for a maximum of three additional years.

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4. The role of chairman and chief executive should be separated and the
chairman should ideally be a non-executive director. The appointment
of chief-executive and other whole-time directors should be made by
the board with the help of a nomination committee comprising of
majority of non-executive directors. The nomination committee could
have a nominee of the government or any institutional shareholder
having a stake of more than 26 per cent.
5. The credit/investment committee of board should have a fair number
of independent directors.
6. Audit committee comprising of independent non-executive directors
should be made compulsory.
7. The compensation committee of the board consisting of non-executive
directors And headed by a chairman should be the final authority to
decide the compensation payable to the staff.
8. The financial institution should be brought under the regulatory and
supervisory ambit of the reserve bank.
9. The management should be accountable only to general body of
10.The regulatory practices should be aligned with international practices
after making suitable modifications.

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In the present corporate world, corporate governance has takes significant
role due to globalization and liberalization. The issue of corporate governance
in banking sector is more complex significance because of certain factors. It is
opined that the success of corporate governance in Indian banking sector depend
upon well-constructed financial sector reform in line with corporate
reconstructing. A piece-meal approach to such a vital sector of the economy
would be of serious consequences. What is urgently required is to observe and
well document of corporate governance rules and regulations. It helps the
banking sector by an effective means of investors protection, fund raising
ability, maximize shareholders value and finally, integrating Indian banking
system with the world economy.
Corporate governance initiatives for banks become imperative for the
following issues:
Banking sector has strong linkage with real sector of the economy and
they are a major source of funding and payment to all types of
economic activities.
Banking sector has mixed ownership in the form of nationalized
banks, private sector banks, foreign banks and other financial
institutions. The recent entry in capital markets and followed changes
in the ownership of banks necessitate changes in the reporting and
governance standards.
RBI would continue the central monitory regulator in the economy
through more independence and would be given in the Prime Lending
Rate (PLR), operational areas and diversification opportunities
available to the individual banks. This helps to enhance the
profitability of the banks.
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In times of distress, banks are generally given access to the safety

net arrangements by the RBI or the government of India. This safety
net arrangement is expected to protect the payment system and the
interest of the depositors. The systemic dimensions of these measures
are also vital to the financial health of the economy.
Banks are highly leveraged entities and their success/failures would
have impact on the monitory sector of the economy.
The emerging corporate governance guidelines for banks would play
vital role in fulfilling broader expectation of the society.

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