RBI’s new paper places too much onus on bank boards to ensure good governance(The Hindu)

Mains Paper 3:Economy 
Prelims level: Not much 
Mains level: Measures suggested by the RBI for new standards of governance at banks

Context:

• The Reserve Bank of India has put out a discussion paper to flesh out the governance structure at commercial banks and institute new checks and balances on their business, compliance and risk management functions. 
• Taking the view that being in the financial intermediation business makes a bank accountable not just to its shareholders but also depositors.
• The RBI is seeking to put the onus of governance mainly on bank boards and their senior management teams. 
• This paper recommends the ideal composition of bank boards, sets hard.........

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Recommendations: 

• To ensure that bank employees cutting across hierarchy are aware of their priorities, the paper proposes that boards set the ‘tone at the top’ for correct behaviour and formulate written policies on code of conduct. 
• A top-down approach is in order, written codes have proved hardly any deterrent to misbehaviour in the past. 
• The more concrete prescriptions are those requiring board members to disclose conflicts of interest upfront and to refrain from related party dealings, except where they can prove arm’s length. 
• Specifying that the chairpersons on bank boards be independent directors, and that top managers from the risk and compliance functions report directly to the board instead of the CEO, are good steps to ensure that they are not hijacked by profit motives. 
• But based on the YES Bank débâcle, the RBI also appears to be correlating weak bank governance directly with CEO tenure. 
• It has proposed a maximum tenure of 10 years for promoters functioning as bank CEOs and 15 years for professionals in this role. The link however is quite tenuous, with many well-governed banks (Kotak Mahindra Bank and HDFC Bank, for instance) featuring CEOs with long tenures. 
• If a 10-year limit is deemed essential to prevent excessive concentration of power in the promoter-CEO, it isn’t clear why a professional CEO must be allowed 15 years. 
• This proposal reflects the RBI’s lack of policy clarity on whether higher promoter skin-in-the-game or professional management leads to better governance.

Shifting supervisory responsibilities for good governance:

• Overall, there’s also the question of whether the RBI is attempting to shift too much of its own supervisory responsibilities for good governance on to bank boards. 
• The bank’s Nomination and Remuneration committee is now expected to vet its directors and prospective CEOs for ‘fit and proper’ criteria and the Audit Committee is expected to oversee vigilance functions. 
• While insisting on some accountability from boards is welcome, stretching the concept too far can lead to conscientious individuals shying away from taking up board positions. 

Conclusion:

• Apart from attempts to tone up internal governance.................

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Prelims Questions:

Q.1)With reference to the GM crops, consider the following statements:
1. Bt Brinjal is the only GM crop that is allowed in India.
2. In India, the Genetic Engineering Appraisal Committee (GEAC) is the apex body that allows for commercial release of GM crops.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer................

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Mains Questions:
Q.1)Describe the key measures suggested by the RBI for new standards of governance at banks.