Governance in Banks Back on the Drawing Board of RBI
A strong financial sector is the foundation on which India’s emergence as a global player would rest. In due recognition of that, the very comprehensive "Discussion Paper on Governance in Banks" comes from the Reserve Bank of India (RBI) is a formidable effort to set the house in order and bring about the much-needed reforms in banks. Large balance sheets do not add much strength, nor report on good governance, as a reflect on just a one-day-in-a-year picture.
There and is a broad realisation that a change in the mindset among bankers would come about neither by the diktats of the RBI nor by those of the bank’s owner, but rather, by internalising the best governance factors. Despite the excess liquidity pumped into the banks during the last six months, credit to the needy does not flow. Risk aversion needs reversal and this can happen with good, responsible and accountable governance.
 
Increasing bank frauds, cybercrimes, arrest of some top executives and chairpersons of reputed banks like the ICICI, failures of PMC Bank, Times Bank, Yes Bank and several others in hiding, have obviously triggered the RBI into getting to the drawing board on governance. The paper has heavy referencing to the Basel Committee on Banking Supervision (BCBS), the Organisation for Economic Co-operation and Development OECD and the Ashok Ganguly Report, bringing back to the drawing board of the RBI its seriousness in action and not just intention. 
 
Contextually, it is heartening to see that what I have been articulating since 1999: Corporate Governance in Banking & Finance (Tata-McGraw Hill, 2000 with YRK Reddy) and ‘A Saint in the Board Room’ (Konark Publishers: 2011) with R Durgadoss, finds an echo in the paper. Two decades of wait has been worth it.
 
The government, going by the experience so far, considers that institutions created under its fold are holy cows and should, therefore, be protected at the cost of the exchequer. Hopefully, the GoI (Government of India) would embrace these governance reforms in public sector banks (PSBs) and hasten corrections with a sense of urgency.
 
There is enough proof in India that regulation and bank supervision are interdependent and not of independent of governance in banks. Both have limitations with effective interplay among them. Viewed from this angle, the Discussion now specifies the key stakeholders’ role, distinguishes the role of the non-executive director from those of the independent director and the workmanship director.  
 
A foundation is built for the whole house; there are not separate silos for the kitchen and the bedrooms. In the same way, audit, compliance and risk management should maintain their necessary independence — but not operate in three different silos. Governance is the binding force/material and it rests on the board. It helps all the three groups speak the same language and connect with business processes and products. 
 
The Discussion Paper concentrates on the audit and risk processes as more proactive than reactive until now. Once the house is built, no one would like to go to the foundation to make changes. Therefore, change management is extremely crucial. Board cannot be expected to do the change management function. Change management requires federated ownership, to cite a Governance, Risk Management and Compliance Management (GRC) framework study.
 
Two aspects are needed in order to trigger the actions mentioned in the discussion Paper , although experts in various fields are taken on bank boards. Knowledge cannot be taken as something given and permanent and it requires frequent updation.
 
1. Directors should themselves be prepared for new responsibilities and new roles. In the first meeting of the board, the first item on the agenda should be the series of actions ordained in the Discussion Paper and their understanding in the present and emerging context. Each director may be asked to furnish upfront what he or she would like to contribute to the board and the objectives of the bank. This would be the board’s review point half-yearly and annually. Qualitative change will become possible through this measure.
 
2. Half-yearly retreats for self-renewal of the board directors away from the traditional board meetings has the potential for a free and open discussion on the issues - both internal and external - to the organization. It is not a common practice to have a separate budget for board management. It is good to have a board approved budget for its own functioning and knowledge upgradation. Usually good directors will be on the learning curve and hence, wisdom lies in taking advantage of it. ‘Fresh thinking’ that the RBI advocated would be possible with such a measure.
 
Even mega banks, measured by their balance sheets, suffer from issues that they would prefer to hide, and therein lies the danger. One of the leading large PSBs in its latest balance sheet has very low net interest earnings – not just due to low credit outflow but more due to gains in the reduction in the interest rate on deposits, for nine-times in a year! Depositors are minority stakeholders. The bank earned profit from sale of its stake in a subsidiary and not due to its core banking business where credit sale is poor and deposits rose despite and not because of its efforts. 
 
RBI cannot be a gatekeeper of the banks. It can only direct the banks to take care of the interests with due concern for the economy and various other constituents. It is here that the whistle blower policy implementation becomes crucial. We have seen lackadaisical responses even to RTI (Right to Information) questions and resorting to the courts for seeking responses. Such an approach will work in the absence of transparency persons in responsibility are not held accountable.
 
The Paper has fully accommodated the recent statement of the FM that the banks need not be afraid of the three ‘C’s – the Central Vigilance Commission (CVC), the Central Bureau of Investigation (CBI) and the Comptroller and Auditor General (CAG) as such references would be made only after fully exhausting internal examination and action. 
 
While minority shareholders’ interest may be taken care of, depositors turning a minority stakeholder, would harm the interests of banks in the long run. The correction can come from governance and the RBI’s latest approach makes adequate mention of it in its paper. 
 
It is also interesting to find that the RBI as regulator would divest its participatory role in the board. One hopes the government of India would not raise any objection on this issue. It has been noticed thus far that the value the RBI director imparted in the board disclosures has not been significant. 
 
There is a thin line between the non-executive directors and independent directors and this subtlety has been well addressed in specifying their roles in the NRC committee and audit committee. Risk management committee chair to be directly responsible to the chairman is worthy of note. It has rightly identified risk appetite framework as crucial for the eventual risk measurement and management. Those who cannot risk prudently cannot get rewarded. It could have specified that non-performers, because of their clean slate, cannot be elevated to key management positions in the organisation and the Board would ensure this through its effective oversight. 
 
While it has kept its banner line on culture and values, it could have also constituted an ethics committee with an outside expert nominee of the RBI to chair it and make it responsible to the chairman directly. Business ethics is an oxymoron and therefore, defining it is crucial in financial institutions. Measuring ethics has been templated by the writer in the book A Saint in the Board Room. Corporate executives can be subjected to this test while the board directors are supposed to be ethical, having the right values to uphold the organisational culture. The future tells it all. 
 
(The author is an economist and risk management specialist. The views expressed are personal.)
 
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    COMMENTS

    yerramr

    3 weeks ago

    If everybody is a dishonest loanee, then the NPAs should be 100%. If every banker is honest in assessment and sells only loan products in time and to the requirement of the borrower without undue harassment and delay, repayments and not recoveries would come in. I am a hard core banker for 3 decades and I say this from experience . Most small borrowers whether farmers or MSMEs cannot afford the luxury of evading or avoiding the loan for he keeps needing debt to run his enterprise.
    Second, If one thinks that in a country like India, Rs.35lakhs is a poor pay just because a Bank like HDFC gets a few crores per annum, and with lots of perks for both, there must be a system to cut the salary of HDFC likes in the country. Remember, the huge salaries come out of the earnings of the Banks and not fall from heaven.

    rajoluramam

    3 weeks ago

    Why our bank's loan portfolio is failing? What are the reasons? The first and fundamental reason is
    " we lack basic honesty". Every body who takes loan from a pulic sector bank, tries to evade repayment, whether he is a small or big borrower. Small borrower thinks that, if it is a Government bank one need not repay and it will be subsequently waived. Big borrowers boost the loan requirement by 30 to 40% so that it covers his margin. Due to this, his personal stake in
    estblishing the industry. They try to squeeze as much as possible from the bank by appointing his own kith and kin on high salaries. The bankers are poorly paid and lured by small favours. SBI charman gets 38 lakhs monthly salary as against Rs 55 crores salary by HDFC boss!

    REPLY

    rajoluramam

    In Reply to rajoluramam 3 weeks ago

    Sorry! Itis yearly salary by SBI
    Chairman not monthly.

    How to Prevent Chit Fund Scams
    Chit fund scams continue to be a problem for regulatory authorities. We have come across cases such as the Saradha Chit Fund, Sahara Financial, Rose Valley, PACL, fake cops, unauthorised colleges and courses. High-profile illegal schemes have mopped up more than Rs1 lakh crore. 
     
    Chit funds scams are an efficient evil. They lure unsuspecting people who are the most vulnerable economic class. The abilities of such people to pursue legal remedies to recover their investments are restricted by (a) cost in terms of time and expenses (b) stronger bargaining power of chit fund organisers v/s individual claimants (c) the size of the recovery amount itself (d) lack of collective mass action legal remedies.
     
     
    While this is a laudable step, we would suggest a better framework as follows.
     
    Inform-Verify-Regulate-Remedy Framework
    For any financial scam, a solution can be constructed using the Inform-Verify-Regulate-Remedy (IVRR) principle. First, ensure that people are adequately informed of what schemes are approved, what are their rights, and what are their responsibilities. Second, provide a mechanism for people to verify that they have indeed subscribed to the correct scheme. 
     
    Third, the government must provide such a regulatory framework that lawful schemes have ease of compliance while illegal operators find it difficult to comply. 
     
    Finally, those found guilty need to be punished with jail and punitive damages. The Indian legal system tends to provide for inadequate compensatory damages which dissuade wronged persons from filing legal action.
     
    The solution proposed by the Indian government addresses the last two Rs of the solution – first, they provide for regulations so as to define which schemes are approved and second, they provide the remedy. 
     
    Previously the remedy would be penal – fines and jail for the perpetrators of the scams. But these remedies are incomplete as they do not help recover the money from the perpetrators. This government is trying to improve upon this part of the problem. 
    However, we need to resolve the first two parts of the framework as well.
     
    Improving the Inform-Verify Part of the Framework
    Rajeev Singhal, ex-CQO at CRISIL (@rajeevsinghal) had proposed a solution for this. To inform the interested subscribers of a scheme, we should have a toll-free number. And each approved scheme should have a unique identification (ID) number. The caller will call the toll-free number and enter the scheme number. The system can then provide information on automated voice, short SMS stream or WhatsApp or any such medium as the caller chooses, based on his phone number. 
     
    It will tell you the status of the scheme, whether it is approved or not, latest update, important terms of contract.  It will then provide a unique number. The caller can enter into the contract with that specific number. A copy of the verified contract can be uploaded to caller’s digital locker. The caller will be signed up for alert service - where she will receive all alerts about the scheme organisers’, government’s alerts on the scheme, and government’s alerts on the organiser.
     
    In a future version, we may have a chit fund clearing house system which verifies the contract and scheme subscriber chooses, subscriber’s payments etc. and organisers details.
     
    In Sum
    Financial scams need to be addressed comprehensively. The solution cannot be restricted to regulation and remedy. Over-regulation simply increases costs for genuine firms while offering no protection against the unscrupulous operators.
     
    I have no doubt the specific parts of the solution proposed above can be improved. However, the Inform-Verify-Regulate-Remedy framework provides preventive and remedial system and, thus, a comprehensive protection for customers.
     
    The idea of this solution comes from Rajeev Singhal, former CQO, CRISIL, he can be reached at @rajeevsinghal on twitter. 
     
    (Rahul Prakash Deodhar is an Advocate, Bombay High Court. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.)
     
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    COMMENTS

    Meenal Mamdani

    3 weeks ago

    Excellent. This automated information service will make information available to any one who seeks it at no cost.
    The problem though is that many people listen to advice from their relatives, friends, etc. instead of doing research themselves. If a person chooses to do that, information no matter how easily accessible will be of no avail.

    IL&FS: What Use Are Forensic Audits Without Fixing Accountability?
    UPDATED on 13 June 2020 at 9.10am to add response from IL&FS.
     
    In the past couple of weeks, two publications have published exclusive reports on the second forensic audit of ITNL (IL&FS Transportation Network Ltd). ITNL, like IFIN (IL&FS Financial Services), is one of the two big listed entities of the mammoth 347-company conglomerate that Ravi Parthasarathy built and destroyed before resigning in July 2018 on health grounds. 
     
    These reports don't add to what we already know from the first forensic audit of IFIN, except to provide more granular details about the lies, dubious dealings, lawlessness, collusion of auditors and law firms (who like to call themselves officers of the court), fixing of bids, relentless routing of money between firms to hide finances and handing lucrative contracts to those who colluded with the group irrespective of their work experience, ability to deliver or financial soundness. 
     
    All of this was hidden in a seemingly magical bubble of lavish salaries, perks, international travel, and expensive lifestyles for the charmed inner circle of executives who participated in the reckless expansion of this  ‘systemically important’ financial conglomerate. 
     
    Those in the financial sector may devour detail of these fraudulent deals, but the rest of us want to know what the government has done about it. Why has enforcement action flagged after the Enforcement Directorate (ED) and the Serious Frauds Investigation Office (SFIO) filed their initial charge sheets?
     
    It is almost two years since IL&FS began to default (as first reported by Moneylife) and the government sacked the board to hand over control to a bunch of retired babus with top banker Uday Kotak as chairman of the board.  
     
    The cost of the resolution effort is well over Rs100 crore paid out to five expensive legal and advisory firms. What do we have to show for it?
     
    Well, a couple of major divestments have been to partner entities but most of the road projects remain in limbo especially after the Covid lockdown. Orix Corp of Japan, which already held a 51% stake in a set of seven wind power companies, has acquired the balance 49% in April 2020 for just over Rs6 crore.  Orix holds a 23.54% stake in IL&FS, the holding company, but has been a silent witness to Mr Parthasarathy’s shenanigans for over two decades. 
     
    The controversial, Rs70,000 crore Gift City of Gujarat has finally been acquired by a Gujarat Government entity at the end of May by paying Rs32 crore for a 50% stake. This was another project where babus were wilfully blind. So glaring was the loot that an independent director and audit committee head, went to court with a public interest litigation just to force officials to protect public money. 
     
    Other than this, five senior executives (former vice chairman Hari Sankaran, IFIN chief Ramesh Bawa, full time directors Arun K Saha, Ramchand Karunakaran and Mukund Sapre, who were part of Mr Parthasarathy’s close cabal) remain in jail for almost a year, while the founder remains untouchable, ostensibly on health grounds. 
     
    Almost everybody agrees that the resolution process has been shockingly slow and mismanaged. Is this to protect Parthasarathy and his clique or the bureaucrats and lenders who colluded with him?  
     
    Let’s examine the actions of each of these stakeholders in the context of the ITNL forensic report having confirmed what the IFIN forensic audit by Grant Thornton had already revealed in its first interim report. 
     
    The Auditors: The Indian Express, which has accessed the GT forensic report says SRBC & Co., (an arm of Ernst and Young), as the auditor to ITNL, appear to have kept out concerns about its viability as a going concern after meetings with the management for 2017-18 (concerns were raised only in the June 2018 quarter report published on 13th August after Mr Parthasarathy had stepped down as chairman, says the paper). 
     
    This, it says, had happened even though chairman Parthasarathy himself had admitted in an email to his top management cabal, just five days before this meeting that “It may not be feasible to sustain ITNL cash flow requirements much longer”. 
     
    According to the article, Mr Parthasarathy’s email speaks of formulating a scheme to approach banks and “keeping the RBI advised”, but did not see ‘much point’ in seeking their approval as RBI had got rid of all its earlier ‘debt restructuring schemes’. 
     
    The regulator: We already know that the RBI has consistently ignored all attempts by whistle blowers and even IL&FS’s partners and investors like AIDQUA, to draw attention to its crooked functioning. 
     
    The SFIO has, for the first time, has questioned the role of RBI officers in failing to initiate timely action. But there were no names mentioned to indicate where the buck stopped. 
     
    The latest forensic audit, reported by Moneycontrol reveals that Ravi Parthasarathy had discussions with R Gandhi, then deputy governor on 19 March, 2016 for “formulating a new legislation to facilitate fund raising by the (IL&FS) holding companies”, which were already a financial mess. 
     
    Remember, this was 2016, but the RBI did nothing until IL&FS crumbled on its own in August 2018. For two full years, RBI raised no alarm, did not tighten supervision, force better disclosure or prevail on IL&FS to cut the flab, sell companies and streamline operations. In fact, government and the regulators and the government were even clueless about the exact number of companies in the group. 
     
    Two years later, Mr Gandhi has been the government’s chosen director on Yes Bank (when it was sinking rapidly and again after the bailout). So not only are there no consequences for silence and acquiescence but there is actually a reward. Remember, Mr Gandhi was also in charge of the messy demonetisation of currency in November 2016, which dealt the first big blow to our economy. Mr Gandhi did not respond to my whatsapp message about his and the RBI’s failure to act against IL&FS. 
     
    The executives: Now let’s look at how the top executives, other than those who are in custody has fared. As mentioned in my previous column, the new board of IL&FS felt the need to offer bonuses to some executives to ‘persuade’ them to say on. These were paid out between 31st march to 4th April and had caused a lot of outrage in the organisation. 
     
    When I brought this to the notice of RBI and chairman Uday Kotak, the payments were frozen on 7th April, after Rs4.48 crore out of a proposed payment of Rs11 crore had been paid out.  These are people who ought to be happy they have a job when so many were sacked, but the board of retired babus believed they needed a 10% incentive payment to get their support in a scam-ridden group for a recovery process that is moving at a snail’s pace.
     
    The recipients include Mr Dilip Bhatia, who has been promoted to CEO, despite a growing body of information about how he was part of Mr Parthasarathy’s favoured cabal, which destroyed the organisation. The others are S C Mittal (CEO, ITNL), M Wagle (CFO, ITNL), Sanjay Arora (HR chief), Sudakshina Bhattacharya (CHRO), Mr Krishna Kumar (CEO, IIML) who has resigned despite the persuasion bonus, Manoj Borkar (CFO, IIML), Mr Savio (IT Head), Anil Sharma (CEO Elsamex), which one of the most controversial group of global companies, that has escaped deep scrutiny for two years, Kazim Khan (CEO, IECCL), Naveen Agrawal (CFO, IECCL).
     
    Remember, IL&FS always paid very high salaries and all these executives continue to be paid very well even while the group companies report mammoth losses and ordinary people have their provident fund money stuck in the group!
     
    I have asked the official spokesperson of IL&FS about Mr Dilip Bhatia’s elevation despite forensic audits exposing his complicity in fraudulent dealings and mismanagement. I have also asked how the board could justify bonuses to heads of hugely loss making entities such as ITNL and others. I have also asked whether Cyril Amarchand Mangaldas continues to advise the group despite clear conflict of interest, since it had advised Mr Parthasarathy in the past about not approaching the bankruptcy court. The company declined to comment.
     
    Everybody from the regulators, to investors, lenders and partners, especially the bureaucracy were co-opted and induced to look the other way in the IL&FS scam. But none of them will pay the price. 
     
    Funnily, despite the slow progress of resolution and stalled action, the government is apparently sanguine about progress, even while pension payments are held up. In an interview to the PTI on 5th April, just after the Covid-19 related lockdown was announced, Mr Injeti Srinivas, Secretary, Ministry of Corporate Affairs claimed that a substantial portion of IL&FS’s Rs94,000 crore debt would be recovered. 
     
    A month later, all we see is some paltry recoveries from Gift City and the Wind Power companies, very little progress on getting various states such as Tamil Nadu to buy out IL&FS stakes in their joint ventures and a massive increase in losses. ITNL alone has reported a massive loss of Rs17,000.32 crore for fiscal year 2019-20 as against a standalone profit of Rs251.76 crore in 2018-19. 
     
    Yet, in the strangest assertion, Mr Srinivas claimed that “the elephant” had gone amock and “it was strange that nobody saw it, whether it was statutory auditors, independent directors, credit rating agencies or others”. This, as we have proved is absolutely false. Everybody from the regulators, to investors, lenders and partners, especially the bureaucracy were co-opted and induced to look the other way in the IL&FS scam. But none of them will pay the price. 
     
    UPDATE:
    IL&FS subsequently got back with a response to say: “Retention payout under key resource program (KRP) included people that were critical to see through the enormous resolution mandate across IL&FS group companies. Commitment and performance  formed important basis of this one time payout (from operational cost) and was paid on completion of performance and retention period. The list of eligible population was identified across companies for this payout after evaluating relevant aspects. Total payout till date is Rs4.48 crore. This was not a bonus, hence not linked to company performance”.
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    COMMENTS

    Sudhir Mankodi

    3 weeks ago

    All those on board of these companies must be arrested, their assets be attached and onus of proof should be on them to prove that they are innocent. Seeing them freely moving in public is shame on our investigating agency.

    doctordhanbpathi

    3 weeks ago

    https://www.moneylife.in/article/ilfs-what-use-are-forensic-audits-without-fixing-accountability/60626.html

    1. Now, Indian economy is with the PMO, under Modiji’s stewardship. In 7 decades+ of independent India, we never heard about forensic audit. Let us expect breathing time to set right the looted institutions, identify & punish the guilty.
    2. Modiji proposes to bring down interest rates of lending to be 4% PA on par with the US, New Zealand & Singapore, etc.
    3. Just in 2 months lockdown, there was a windfall from the PSBs’ kitty. By paying 5-7% interest to depositors, PSBs contributed Rs.20 trillion to RBI & are eligible to seek interest @3.75%. The Karma Yogi PM & UFM have done a good job by re-allocating major chunk to finance to MSMEs, Industries & Agriculture, etc., with liberal interest between 5-8%. By noting the virulent attack on fugitives, Vijay Mallya, Nirav Modi, Mehul Choksi, X-IBA Chairperson, ICICI Bank CEO, etc., PSB-CEOs stopped lending to protect their skin.
    4. The rates on deposits are bound to fall down further. Modiji got the entire decision power of UFM to PMO to study the juggernauts of FX, dollar-rupee parity, the amt. stagger-out by the then ruling party politicians, fugitives & PSB directors, etc.
    5. An amount of Rs.17000 trillion was looted. As a matter of fact BJP led NDA has an ambitious plan to mobilize US$.5 Trillion [INR.350 trillion] by issuing SOVEREIGN BONDS. 48TIMES MORE THAN SOVEREIGN BOND PROCEEDS was already looted.
    6. The stage is set to realize the dream of our Karma* Yogi PM Shri Narendra Modi S/o. Late Shri Damodardas Modi, with a revolutionary mindset. He was elected 1st time MLA to become Gujarath CM & 1st time MP to become Indian PM. He is an excellent visionary + dreamer. His life goal is to usher in ‘THE BRIGHT FUTURE FOR THE TEEMING MILLIONS OF THE TALENTED, QUALIFIED & INTELLIGENT YOUTH; SO THAT INVESTORS FROM ALL OVER THE GLOBE SHALL INVEST HERE”. REVOLUTIONARY CHANGE IS A MUST TO SAVE FUTURE GENERATIONS.
    7. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    8. SATYAMAEVA JAYATHE!!!

    REPLY

    keshavkrocks.16

    In Reply to doctordhanbpathi 3 weeks ago

    All ilfs saga happens in same karma yogi Shri Narendra Damodardas Modi and things like these are going to happen when independent directors are not independent in reality. Do you know who is independent auditor of ONGC! A guy who do modi bhakti 24 hrs.

    doctordhanbpathi

    In Reply to keshavkrocks.16 3 weeks ago

    GE Keshav Ji! Maybe, the so-called Bhakt is inspired to look into ONGC transactions from the angle of identifying any frauds & the guilty.

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