Good start

The last two years have seen crises unfolding at two private sector banks and escalating high-value frauds in public sector banks. It is clear that the top managers, boards and employees of commercial banks ought to be held to higher standards of corporate governance than their counterparts in non-financial companies. The Reserve Bank of India’s discussion paper in June 2020 attempted to make a beginning on this by focussing on the role of bank boards, appointment of top managers and separation of ownership from management in private banks. Cherry-picking ideas out of this paper, the RBI issued two circulars last week.

The central bank seems to have taken to heart concerns that allowing top executives of banks to become too entrenched in their positions aids and abets poor governance. It has thus sought to cap the tenure for professional bank CEOs at 15 years and promoter-CEOs at 12 years, with reappointments allowed after a three-year cooling off period. Banking is a cyclical business that needs a seasoned hand at the helm. It is therefore difficult to muster concrete arguments on an ideal tenure that will strike the correct balance between having an experienced CEO and reining in his excessive influence over decision-making. YES Bank did slip under an entrenched CEO, but HDFC Bank and Kotak Mahindra Bank (with CEOs who had stints of 24 and 18 years , respectively) offer evidence that long-tenured bank chiefs can run a tight ship on both lending and risk management. Having said this, fixed tenures for bank CEOs certainly makes succession planning a smoother affair without uncertainty around regulatory approvals each time they are due for extension. The circular also lays down requirements to ensure that the three crucial committees of bank boards — the Audit Committee, the Risk Management Committee and the Nomination and Remuneration Committee — operate independently. It decrees that all three committees be made up mainly of independent directors, with limited influence from employees or the Chair. But whether this alone will be sufficient to tone up board oversight is doubtful, as the circular leaves out the delineation of functions for these committees spelt out in the original discussion paper. In a welcome aside that recognises the complexity of bank operations, the RBI has tried to make bank statutory audits more fool-proof by requiring joint audits by anywhere between two and 12 firms for banks with asset sizes of ₹15,000 crore and above.

Piecemeal as they are, the above changes do make a beginning on an overhaul of corporate governance at private sector banks. It is unfortunate though that most of them do not apply to nationalised banks. With their top management tenures at just three years, long delays in filling top positions and an ad hoc appointment process influenced by their largest shareholder, it is time PSBs, which hold the lion’s share of deposits, are held to the same governance standards as their private peers.