Recently, while the Securities and Exchange Board of India (Sebi) campaign for corporate governance ratings was at its peak, I chanced to meet Sebi chairman G N Bajpai and the managing director of a leading private sector bank at a function. The banker was gung-ho about the concept of governance ratings, and told Mr Bajpai and me that his bank would love to come forward and get itself rated. Last Friday, when Reserve Bank of India (RBI) governor Bimal Jalan underscored the need for the highest form of corporate governance in the banking sector at the FE Best Banks Awards function, he couldn?t have been making a more vital point.
Unlike corporations, the role and responsibility of banks as corporate entities are manifold. As listed entities, they are answerable, naturally, to the large body of their shareholders, and need to be continuously upgrading their own standards of performance to keep them happy. As banks, however, they are accountable to the constituency of depositors and borrowers and it is this ?external? constituency which is critical to any bank?s functioning. In order to be truly effective in good governance, a bank must ensure that it addresses the concerns of all these constituencies equally. More so, since accepting public deposits deals with extreme faith and trust.
In case this constituency is not kept informed of the developments, the direction and the overall strategy the bank is undertaking in order to grow and share that growth with all these ?stakeholders?, a bank can spark off severe systemic risks for the financial sector as a whole. This is exactly what was on the verge of being witnessed during the scam of 2001, where a handful of errant cooperative and private banks made a mockery of the rules and regulations in place. It was then upon RBI to muster its entire supervisory and regulatory prowess to ringfence the problem and ensure that the entire system was not endangered.
Good governance in banks, therefore, is not to be treated at par with that in companies. In fact, banks must ensure they fulfill all the criteria in place for companies and go several steps further, given the other additional and critical constituencies they serve. Unfortunately, despite several checks and balances, regulations and warnings, this does not seem to have been internalised in banking systems as yet. We still have, in today?s banking sector in India, pockets where good governance is seriously lacking, leading to a consequent deterioration in public and shareholder confidence in these institutions. And I am not just talking of the private sector banking entities.
It is equally important for public sector banks ? probably even more so ? that they start preparing themselves for life outside the government?s shadow, when sovereign ownership will not be the determining factor for shareholder or public confidence. They will have to internalise, follow and take forward the concept of good governance early enough, so that when the ownership change takes place in the near future, these state-run banks are also well prepared.
A basic requirement of good governance in banks is the quality and skill sets of the members of the board of directors and the level of integrity they possess. Transparency in balance sheets is equally critical. And at a time when the RBI is keen to move away from micro-management of banks to setting the general rules of fair play, it is all the more necessary for banks not to turn to regulatory signals or guidance for every internal action. Banks must learn to play fairly in a free environment. As competition grows and newer players begin entering the arena with their own strategies and business models, good governance will hold the key to healthy bottomlines. The sooner Indian banks realise this, the better.