Banks accept colossal amounts of uncollateralized funds from the public in fiduciary capacity. So, their quality of governance should be fit and proper. Besides the RBI, Basel also has proposed some strategies and techniques for best governance practices in banks. While banks' governance practices depend largely on market discipline and regulatory environment, there is a need to carefully address issues like transparency, ethics and values in corporate governance, ownership and control.
Corporate governance has at its backbone a set of transparent relationships between an institution's management, its board, shareholders and other stakeholders. It, therefore, needs to take into account a number of aspects such as, enhancement of shareholder value, protection of shareholders' rights, composition and role of the board of directors, integrity of accounting practices and disclosure norms and internal control system. In a service industry like banking, corporate governance relates to the manner in which the business and affairs of individual banks are directed and managed by their board of directors and senior management. It also provides the structure through which the objectives of the institution are set, the strategy for attaining them is determined and the performance of the institution is monitored.
Banks are special entities as they not only accept and deploy large amounts of uncollateralized public funds in fiduciary capacity, but also leverage such funds through credit creation. The very nature of the banking business necessitates "fit and proper" governance. The quality of governance in banks depends on market discipline and regulatory apparatus. The objective of the policy is to strengthen the banking systemmake it strong, resilient, trustworthy and reliable. The bank's management should take care of investors' interests and preserve the value of their investments. They should also give due consideration to the depositors' interests and have strategies to avoid market shocks. |
