The routine annual inspection of banks conducted by the Reserve Bank of India (RBI) was quite a long-drawn process this time around. The focus, though, was more on the qualitative aspects rather than the numbers itself.

One of the feedback given by the RBI to most banks, especially those in the private sector, was to strengthen the composition of their boards.

With governance and compliance taking the centre stage for the banking regulator in recent years, highly placed sources told businessline that the diktat to banks was to rope in well-established and reputed professions with strong banking sector and/or financial services work experience in the board.

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In fact, the regulator is in favour of appointing such candidates to lead the board as the chairmen. “The aim is to ensure that the board doesn’t end up being a rubber stamp or an extension of the CEO’s office and it can question and challenge the functioning of banks. If the chairman has strong financial services sector expertise and can act in an independent manner that would strengthen the quality of the board,” said a person aware of the matter.

Improving accountability

Apparently, the regulator has observed that the board, especially its chairman, is quite ‘friendly’ with the managing director and chief executive officer (MD and CEO) of the bank, and hence, the influence of the MD and CEO is unduly high not just over the bank’s functioning, but even at the board.

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“There needs to be balance and someone to keep a check on the autonomy of the MD and CEO. If a former banker is brought in at the chairman level in the board, it would improve the accountability of the MD and CEO and act as a second layer of authorisation in the system,” said another person aware of the matter.

Adding that while the intention of the regulator is not to interfere with the internal functioning of banks, the person cited above said that when the current chairmen are due for reappointment, banks have been asked to consider onboarding former bankers and finance professional into the board to enhance its composition.

At present, most banks rope in academicians and multi-disciplinary professionals including former civil servants into the board, with an objective of broad basing and diversifying the skillsets of the top management. However, it has been observed that this approach hasn’t yielded the desired results.

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