1. UNIT-4
Current Issues & Emerging Trends
Meaning of Corporate Governance in Banks
Corporate Governance” is the mechanism by which managers are selected, motivated, and
become accountable shareholders, and managers as well. Banks work differently in their
financing, business model, and balance sheets from most non-financial firms.
Indian Banking sector is Governed by the Reserve Bank of India (“RBI”). Central Bank of
India regulates all the major issues related to currency, foreign exchange reserves of Public
Sector as well as Private Sector. Banking Governance for banks is crucial for the development
of banking activities. RBI has brought out specific guidelines for corporate governance for
banks.
Importance of governance in the Banking Sector
Governance has always been a significant factor for the growth of the economy and
strengthening the banking and corporate sector. The resources are utilized to their maximum
limit, it flows to the sectors where the entities where there is an adequate production of the
services which fulfills the demands of the stakeholders. Corporate Governance has been the
most useful and efficient framework by the best board of directors on the board to govern the
use of the resources and reducing spoilage.
2. Different Countries have different corporate governance for their banks. The Basel
Committee was formed in 1999 to dignify the diversity in the corporate governance
mechanism globally. This Committee was also formed in 1997 and 1998. This Committee
provided mainly four important forms to be included in the organizational structure of any
bank for proper functioning: the corporate values, codes of conduct and other standards of
appropriate behavior and the system used to ensure compliance with them;. These are
listed as follow;
• A proper and regular surveillance by the Board of Directors and Supervisory Board. The clear assignment
of responsibilities and decision-making authorities, incorporating a hierarchy of required approvals from
individuals to the board of directors.
• A direct business line supervision of different business areas. A well-defined corporate strategy against which
the success of the general enterprise and also the contribution of people will be measured.
• Surveillance by the individual not involved in day-to-day business areas. A special monitoring of risk
exposures where conflicts of interest are likely to be particularly great, including business relationships with
borrowers affiliated with the bank, large shareholders, senior management, or prime decision-makers within
the bank.
• Independent risk management and audit functions. The establishment of a proper mechanism for the
interaction and cooperation among the board of directors, senior management, and therefore the auditors.
• The committee also focuses on the importance of the personnel being fit and proper for their job by
transmitting the flow of information both internally and to the general public.
• The financial and managerial incentives to act in an appropriate manner are offered to senior management,
product line management and employees within the variety of compensation, promotion, and other
recognition.
3. The five principles of corporate governance
The five principles of corporate governance are responsibility, accountability, awareness, impartiality and
transparency.
1. Responsibility
• It’s a two-way street between shareholders and directors: if directors are in the job on the say-so of
shareholders, they are answerable to those shareholders. Remember this.
• A board is responsible for fulfilling shareholders’ wishes. That involves shepherding a company away
from risk, around challenges, and towards success while staying true to its mission, respecting the law of
the land, and the sensitivities of the politics around them. It’s a difficult job, but this is what
responsibility truly means.
• One of the board’s most important functions is to select a CEO who will enable the company and its
workers to achieve their full potential
2. Accountability
• No matter what decision a board takes, they should be able to back it up.
• Important corporate decisions will inevitably lead to questions, and this isn’t a bad thing – merely a
sign of engagement and diligence.
• “Why did you appoint this CEO over other candidates? Why did you select this as a top priority?
Why are we focusing corporate resources on ESG?”
• As a board member, expect a constant flow of questions like this. When you get them, your job is
to be clear in your answers.
4. 3. Awareness
• The key to a company’s survival and prosperity is to know the landscape of risk around it.
• Boards are always at the forefront of this effort, not just because they are in a position of
responsibility, but because they are usually in their roles thanks to years, if not decades, of
significant, relevant experience.
• With this experience comes the ability to pinpoint as many risks as possible, whether large or
small, short or long term.
• Of course, no company can eliminate risk and should never approach risk management this way.
The real trick is deciding which risks to take and which to avoid.
4. Impartiality
• Boards must strike a careful balance between their various responsibilities, the people who answer
to them, and the people they answer to.
• They should approach every decision with an independent mindset, ensuring no personal interests
or those of close colleagues come between them and the correct business decision.
• While impartiality is easy to agree to in principle, it’s easy to slip out of practice. Personal beliefs
and friendships can cloud a board member’s objectivity. A board must know how this can happen –
and how subtle it can be. They should take care to ensure it doesn’t influence their responsibility.
5. 5. Transparency
• This is the most practical principle, and it’s simply about the paperwork. Boards are responsible for
documenting and reporting on everything that’s expected of them as clearly and thoroughly as is
necessary.
Consolidation in Banks
Rationale For Merger & Acquisition in Indian banking:
Mergers and acquisitions (M&A) refer to transactions between two companies combining in some
form. Although mergers and acquisitions (M&A) are used interchangeably, they come with different
legal meanings. In a merger, two companies of similar size combine to form a new single entity. On
the other hand, an acquisition is when a larger company acquires a smaller company, thereby
absorbing the business of the smaller company. M&A deals can be friendly or hostile, depending on
the approval of the target company’s board.
Benefits of Merger & Acquisition
Bank mergers in India help increase the volume of assets and liabilities as the
acquirer bank gets access to all the customers and networks of the acquired bank.
6. Some of the benefits of bank mergers in India include the following:
• Increased financial inclusion as the central banking authority can now spread its network to reach every
nook and corner of the country where the regional or PSU bank has a presence in
• Elimination of wage disparity between small banks and large PSUs
• Reduction in operational costs
• Availability of technology and technical expertise for the smaller banks, improving efficiency, net
banking, and other features for the acquired bank.
• Minimization of costs and overheads by removal of unnecessary posts and administrative expenses
• Improved product range and the broader option of financial instruments for the customers
• Reduced dependence on government funds since the larger PSU bank has its own funds to fall back on,
reducing the need for Government to infuse funds into public banks.
• Implementation of stringent policies and central authority on region-centric banks, helping lower the
instances of fraud or bad loans.
Problems of Merger & Acquisition in Indian banking
• Bank officials and unions of PSBs are against the merger due to issues with employment, seniority,
tenure, superannuation etc..
• Few large inter-linked banks can expose the broader economy to enhanced financial risks.
• The local identity of small banks is not that big.
• Customers feel harassed initially. This in reality has materialized and the banks are working on this.
7. • Acquiring banks have to handle the burden of weaker banks, resulting in risk exposure.
• It is difficult to manage the people and culture of different banks.
• Merger destroys the idea of decentralization as many banks have a regional audience to cater to and
customers often respond very emotionally to a bank acquisition.
• Larger banks are more vulnerable to global economic crises, bail outs can cripple the entire
country’s economy.
• Coping with staffers' disappointment could be another challenge for the governing board of the new
bank which could lead to employment issues.
Meaning of Universal Banking
Universal banking is a combination of Commercial banking, Investment banking,
Development banking, Insurance and many other financial activities. It is a place
where all financial products are available under one roof.
So, a universal bank is a bank which offers commercial bank functions plus other
functions such as Merchant Banking, Mutual Funds, Factoring, Credit cards,
Housing Finance, Auto loans, Retail loans, Insurance, etc.
8. Rationale of Universal banking in India
• Universal banking is done by very large banks. These banks provide a lot of
finance to many companies. So, they take part in the Corporate Governance
(management) of these companies. These banks have a large network of branches
all over the country and all over the world. They provide many different financial
services to their clients.
• In India, two reports in 1998 mentioned the concept of universal banking. They
are, the Narsimham Committee Report and the S.H. Khan Committee Report.
Both these reports advised to consolidate (bring together) the banking industry
through mergers and integration of financial activities. That is, they advised a
combination of all banking and financial activities. That is, they suggested a
Universal banking.
• In 2000, ICICI asked permission from RBI to become a universal bank. RBI
wants some big domestic financial institutions to become universal banks.
9. MERITS OF UNIVERSAL BANKING
1) Economies of Scale. The main advantage of Universal Banking is that it results in greater economic
efficiency in the form of lower cost, higher output and better products. Many Committees and reports by
Reserve Bank of India are in favour of Universal banking as it enables banks to use economies of scale
and scope.
2) Profitable Diversions. By diversifying the activities, the bank can use its existing expertise in one type
of financial service in providing other types. So, it entails less cost in performing all the functions by one
entity instead of separate bodies.
3) Resource Utilization. A bank possesses the information on the risk characteristics of the clients, which
can be used to pursue other activities with the same clients. A data collection about the market trends, risk
and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis,
etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being
involved in the researching
4) Easy Marketing on the Foundation of a Brand Name. A bank's existing branches can act as shops of
selling for selling financial products like Insurance, Mutual Funds without spending much efforts on
marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the
client even in the remotest area without having to take resource to an agent.
5) One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction costs and increases the
speed of economic activities. It is beneficial for the bank as well as its customers.
10. DEMERITS OF UNIVERSAL BANKING
1) Grey Area of Universal Bank. The path of universal banking for DFIS is strewn with obstacles.
The biggest one is overcoming the differences in regulatory requirement for a bank and DFI.
Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves.
2) No Expertise in Long term lending. In the case of traditional project finance, an area where DFIs
tread carefully, becoming a bank may not make a big difference to a DFI. Project finance and
Infrastructure finance are generally long- gestation projects and would require DFIs to borrow
long-term. Therefore, the transformation into a bank may not be of great assistance in lending
long-term.
3) NPA Problem Remained Intact. The most serious problem that the DFIs have had to encounter is
bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking or installation
of cutting- edge-technology in operations are unlikely to improve the situation concerning NPAS.
Meaning of Green Banking
Green banking refers to the promotion of environmentally friendly practices and the reduction of the
bank’s carbon footprint. It’s similar to a traditional bank because it examines all social,
environmental, and ecological concerns with the goal of protection and conservation of natural
resources and the environment.
The primary goal of this banking concept is to improve the conservation of the earth’s environment,
habitats, and resources.
11. 1. Encourage people to use online banking instead of branch banking.
2. Online bill payment.
3. Using online banking instead of huge multi-branch banks to open CDs and money market
accounts.
Green bank is a governmental or quasi-public financial entity that works with the private market to
promote the development of clean energy technology using innovative financing approaches and
market development instruments.
Concept of Green Banking in India
In recent years, Indian banks have noticed the developing tendency and have significantly altered
their operational tactics. The Indian banking industry has faced numerous problems, including
changes in customer behavior, technology advancements, regulatory changes, and so on. It has gone
through a series of challenges and has learned to adapt to changing circumstances. Going green is a
new notion in India, and Indian banks have embraced it in a variety of ways. The following are the
different banks in India that offer green banking services to their users.
• SBI has begun to implement a green banking policy. This is India’s first green bank, specializing
in going green and encouraging green energy projects.
• Punjab National Bank: They’d made a number of efforts to reduce emissions and energy use.
• Bank of Baroda: They had undertaken a number of green banking efforts, including the funding of
a commercial project. BOB prefers green initiatives that are environmentally benign, such as
windmills, biomass, and solar electricity, because they assist in collecting carbon credits.
12. Canara Bank has incorporated eco-friendly measures like mobile banking, online banking, telebanking, and
solar-powered biometric processes as part of its green banking effort.
Meaning of Shadow Banking
13. Shadow banking is a term used to describe bank-like activities (mainly lending) that take place
outside the traditional banking sector.
• It is now commonly referred to internationally as non-bank financial intermediation or market-based
finance. Shadow bank lending has a similar function to traditional bank lending. However, it is not
regulated in the same way as traditional bank lending.
• Examples of entities that engage in shadow banking are:
• Bond funds
• Money market funds
• Finance companies
• Special purpose entities.
Concept of Shadow Banking in India
• In 2007, at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in Jackson
Hole, Wyoming, the term “Shadow Bank” was coined by the economist Paul McCulley.
• Leading up to the global financial crisis, one of the many failings of the financial system was
symbolized by shadow banking.
• Short-term funds in the money markets are borrowed by shadow banks, and those funds are used to buy
assets with longer-term maturities.
14. • Mortgage companies, investment banks, markets for repurchase agreements, money market funds,
asset-backed commercial paper [ABCP] conduits, and securitization vehicles are examples of
important components of the shadow banking system.
• The meaning and scope of shadow banking is disputed in academic literature.
• Credit insurance providers, securities broker-dealers, private equity funds, credit
hedge funds, exchange-traded funds, credit investment funds, structured investment
vehicles (SIV), and hedge funds are some of the entities included in shadow banking.
• Shadow banks first attracted the attention of different experts due to their increasing
participation in converting home mortgages into securities.
• A broader definition of shadow banks was developed by the Financial Stability
Board (FSB). This is an organization of supervisory and financial authorities from
international financial institutions and major economies. This included all entities
which performed core banking functions, and which were outside the regulated
banking system.