Enforcement of corporate governance in banks and financial institutions

ENFORCEMENT OF
CORPORATE GOVERNANCE IN
BANKS AND FINANCIAL
INSTITUTIONS
Dr. Chaya Bagrecha
Professor, CMS Business School,
Jain University
Tuesday, June 2, 2020Enforcement of Corporate governance in banks and financial institutions

On 14th Feb 2018, PNB noticed fraudulent transactions worth Rs 11,346
crores at one of its branches in Mumbai. Apparently the branch staff issued
fake LoU (Letter of understanding) for buyer’s credit to companies of Nirav
Modi and Gitanjali Group.
Companies like Gitanjali Gems, Gili India, Nakshatra and Nirav Modi are
said to be involved in this scam.

Nirav Modi identified a loophole in the banking system-between
core banking system and SWIFT
With the help of PNB employees, huge amounts were transferred to
his companies.
At the same time money was raised from other banks also to pay
the suppliers
One employee asked for a collateral and when it was not provided,
refused to give the loan.
Later, the PNB officials filed a complaint with CBI

 Failure of auditors
 Non linkage of CBS with SWIFT
 Management failure
 No rotation of employees

M K Sharma, the senior internal auditor Knew about the fraud, but
did not report to the audit office
Bank did not have enough independent members on the auditing
board during that period
SWIFT transactions were not verified deliberately
Both internal and external auditors intentionally ignored all these
transactions
The audit committee did not examine the report on Forex dealings
All this led to the scam in which thousands of crores of the bank was
lost

• At a time when most banks were struggling with rising bad loans, Yes
Bank Ltd had managed to keep a check on its non-performing assets
(NPAs).
• During the AQR review in 2015, RBI found out some serious issues
related to loan divergence and NPAs at Yes Bank Ltd. RBI also
observed very astounding deviation of 1166% for Net NPAs. The Net
NPA % disclosed by Yes Bank was at 0.29% for Mar 2016, which
according to RBI should have been 3.67%.
• Yes Bank’s total exposure to Infrastructure Leasing & Financial
Services(IL&FS) and Dewan Housing Finance Corp (DHFL) was 11.5%
as of September 2019.

Kickbacks:
Yes Bank used public money to buy DHFL debentures worth Rs 3,700 crore.
DHFL gave Rs 600 crores to DoIT Ventures as "kickbacks". The collateral
was only Rs 40 crore for the transaction.
Rising NPA’s:
Yes Bank suffered a dramatic doubling in gross non-performing assets over
the April-September 2019 to ₹17,134 crores.
Governance issues:
The bank has experienced serious governance issues and practices in recent
years which have led to a steady decline of the bank.
For instance, the bank under-reported NPAs to the tune of Rs 3,277 crore in
2018-19.

“The primary purpose of corporate leadership is to create wealth legally
and ethically. This translates to bringing a high level of satisfaction to
five constituencies – Customers, Employees, Investors, Vendors and the
society-at-large.
The raison d'être of every corporate body is to ensure Predictability,
Sustainability and Profitability of revenues year after year”

Introduction to corporate
governance
Control mechanisms
Corporate governance in
banks

A system of checks and balances between the board,
management and investors to produce an efficiently
functioning corporation, ideally geared to produce
long-term value.

 Sir Adrian Cadbury:
“Corporate Governance is concerned with holding the balance
between economic and social goals and between individual and
communal goals. The aim is to align as nearly as possible the
interests of individuals, corporations and society”
 According to Mr Ratan Tata,
“Corporate Governance is a matter of ‘Mindset and
Tradition”.

It can be said that Corporate
Governance is the set of processes,
customs, policies, laws and
institutions affecting the way a
corporation is directed,
administered or controlled.

Corporate governance models around the world
 The Anglo-American model,
 The German model,
 The Japanese model, and
 The Indian model
Efforts In India
 Securities and Exchange Board of India’s Initiative
 Kumara Mangalam Birla Committee, 1999
 Narayan Murthy Committee Report
 Clause 49 of the Listing Agreement

‘‘Being the managers of other people’s
money [rather than their own] it cannot
be expected that they should watch over
it with the same anxious vigilance.’’
– By Adam Smith, 1776
Thus the need for corporate governance

Good corporate
governance
Company
philosophy
Board of
directors
Audit committee
Renumeration
committee
Shareholders
committee
General body
meeting
Disclosure
Means of
communication
General
shareholder
information
Non-mandatory
requirement

Debt covenants/agreements
External auditors
Government regulations
Media pressure
Competition
Managerial labor market

GOVERNANCE OF BANKS
Banks are a critical component of the economy and are
extremely important engines of growth.
Bank behavior influences economic outcomes of the firms to
which they lend to.
. Banks are also the channels through which the country’s
savings are collected and used for investments.
Banking business is becoming more complex and diversified.
Banks pose a special governance problem.

Well defined role and powers
of the board
Legislation
Management environment
Board skills
Board appointments
Board induction and training
Board independence
Board meetings
Board resources
Code of conduct
Financial and operating reporting
Audit committees
Risk management

These can broadly be classified into the following
three categories:
Transparency
Off-site surveillance
Prompt corrective action.

Top management to play an important role in creating a climate of
transparency, and ensuring that the same is reflected in the annual reports of
banks.
The cost of compliance should not be considered as expenditure but as an
investment with long term benefits.
All the banks should develop a best practice manual for board processes,
procedures and formats.
Professional bodies like ICAI, ICSI, CII, etc., can play an important role in
bringing uniformity in disclosure and transparency

Tuesday, June 2, 2020
 Longitudinal research must be undertaken to understand the implications of
governance on research.
 Banks not complying with governance regulations in both letter and spirit
must be penalized.
 Dynamic supervision of the market regulating bodies like SEBI.
 Over a period of time, local governance practices must harmonize with global
governance practices.
 Learning to think collectively and holistically is the key to
success. So let us do what the scriptures say: “Let us come
together, let us think together, let us combine our
intellectual strength, let our collective brilliance shine, let
there be no malice, let there be no ill will”.
This is what governance is all about.Enforcement of Corporate governance in banks and financial institutions

The fundamental objective of Corporate Governance is the enhancement of
shareholders’ value keeping in view the interests of other stakeholders.
Good corporate governance provides a competitive edge in the global
marketplace, enables companies to raise capital widely, easily and
economically, improves employee morale and generates higher productivity.
Well governed companies last longer, stand the test of time and changing
environment. What remains to be done is that it does not continue to be
reported only in letter but also in spirit.

Corporate Governance in any organization needs to be principle-based
not rule-based. This will go a long way in building the confidence levels
of stakeholders.
Good Corporate Governance will be achieved not by rhetoric or
legislation but honest execution of what is just and fair.
A journey of a thousand miles begins with a single step. Let us begin by
taking that step today.

Enforcement of corporate governance in banks and financial institutions

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