Lok Sabha Question No. 1228 (UNSTARRED), answered on 2020-09-19
Subject: Corporate Governance in Banking Sector
Ministry: FINANCE
Asked by: Parbatbhai Savabhai Patel, Jaswantsinh Sumanbhai Bhabhor, Naranbhai Bhikhabhai Kachhadiya

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF FINANCIAL SERVICES

## LOK SABHA UNSTARRED QUESTION NO. 1228

TO BE ANSWERED ON 19 TH  SEPTEMBER, 2020(SATURDAY)/BHADRAPADA 28, 1942(Saka)

## Corporate Governance in Banking Sector

1228. SHRI PARBATBHAI SAVABHAI PATEL : SHRI JASWANT SINGH BHABHOR: SHRI NARANBHAI KACHHADIYA: Will the Minister of FINANCE  be pleased to state: (a)  whether the Government has taken note of the alleged new cases with respect to the violation of corporate governance norms in the banking sector and if so, the details thereof; and (b) the measures taken/proposed to be taken by the Government to strengthen the corporate governance norms and to improve transparency in the banking sector?

## ANSWER

MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI ANURAG SINGH THAKUR) (a):  The  Reserve  Bank  of  India  (RBI)  has  informed  that  corporate  governance,  risk management, compliance and internal audit functions in the banks are part of the scope of periodic supervisory assessment of banks by RBI and, based on the risk-based supervisory assessments, observations on the identified gaps in these areas requiring attention of the banks and their mitigation are flagged to the banks concerned and monitored by RBI as part of further improvements on a continuous basis. In addition, the Ministry of Corporate Affairs has informed that an  inspection under  section  206(5) of  the  Companies Act  was  ordered against Yes Bank Limited on the basis of a complaint received in July 2020.

(b): RBI has apprised that in addition to flagging identified gaps in corporate governance to the banks concerned and monitoring of the same by RBI for improvements, improvements in governance are effected through an ongoing process and  evolve through periodic supervisory  assessment,  aligning  the  current  regulatory  framework,  including  regulations, advisories  and  guidance,  with  global  best  practices  while  being  mindful  of  the  context  of domestic  financial  system.  In  this  connection,  RBI  has  apprised  that  it  has  taken  the following steps to strengthen corporate governance norms and to improve transparency in the banking sector:

- (i)  In June 2020, RBI has released a discussion paper on 'Governance in Commercial Banks  in  India'  with  the  objective  of  improving  governance  standards  in  and empowering the Boards of commercial banks.
- (ii)  Guidelines  applicable  to  directors  of  public  sector  banks  (PSBs)  nominated  under different statutes and those elected have been aligned with the recommendations of Banks Board Bureau (BBB) on the constitution of the Nomination and Remuneration Committee, and revised guidelines on 'fit and proper' criteria for shareholder directors in the PSBs have been issued.
- (iii) In  alignment  with  the  principles  of  the  Financial  Stability  Board  (an  international standard-setting  body  for  promoting  financial  stability)  for  sound  compensation practices, RBI has issued revised compensation guidelines for whole-time directors, chief executive officers (CEOs), material risk-takers and control function staff of all private sector banks.
- (iv) As  part  of  further  strengthening  of  the  compliance  culture  in  the  banks,  detailed guidelines towards independence  and  enhancement  of  status  of compliance, including appointment of Chief Compliance Officer in banks, have been issued.
- (v)  Instructions  relating  to  the  process  of  appointment  of  Managing  Director  (MD)  and CEO or  CEO  or  part-time  Chairperson  in  private  sector  banks  and  foreign  banks have been revised to enhance disclosure and improve transparency, bring in more clarity  in  information,  align  with  the  provisions  of  the  Companies  Act,  2013,  help recognise actual or potential or perceived conflicts of interest, bring uniformity in the format  for  directors  across  all  banks,  and  enhance  the  rigour  of  due  diligence undertaken before appointment of directors including whole-time directors.

In  addition,  Government  has  instituted  a  number  of  governance  reforms  to  strengthen corporate governance norms in PSBs, and to improve transparency including, inter alia , the following:

1. Since 2015, appointments of the chairpersons, chief executives and other whole-time directors of PSB are being made at arm's length through a professional Banks Board Bureau. The Board has ensured transparency in the selection process by declaring selection  results  on  the  same  day as  the  interaction/interview  with  the  candidates, strengthening the independence of the selection process
2. The position of the Chairman and Managing Director has been bifurcated since 2015 into  those  of  a  non-Executive  Chairman  and  a  Managing  Director  and  Chief
3. Executive Officer in nationalised banks, strengthening independent Board functioning.
3. Ensuring effective use of non-official directors, by giving them mandate to play role akin to independent directors, and institutionalising their peer evaluation and training.
4. Appraisal of top bank executives has been entrusted to a Board committee.
5. Boards  have  been  empowered  to  recruit  the  bank's  Chief  Risk  Officer  from  the market, at market-linked compensation, to attract the best talent for managing risk.
6. The  Risk  Management  Committee  of  the  Board  has  been  empowered  to  set  and review the Risk Appetite Framework and to fix accountability for its observance.