1

Ganguly Committee:

Executive Summary:
1. The Consultative Group of Directors of banks and financial institutions was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis- -vis co!pliance" transparency" disclosures" audit co!!ittees etc. and !ake reco!!endations for !aking the role of Board of Directors !ore effective with a view to !ini!i#ing risks and over-e$posure. %. The Group has produced a list of reco!!endations after a co!prehensive review of the e$isting legal fra!ework governing constitution of the Boards of banks and financial institutions" interaction with various interested groups" organisations" etc. and bench!arked its reco!!endations with international best practices as enunciated by the Basel Co!!ittee on Banking &upervision" as well as of other co!!ittees and advisory bodies" to the e$tent applicable in the 'ndian environ!ent.

Recommendations of the Group:

(. Due diligence of the directors of all banks - be they in public or private sector" should be done in regard to their suitability for the post by way of )ualifications and technical e$pertise. 'nvolve!ent of *o!ination Co!!ittee of the Board in such an e$ercise should be seriously considered as a for!al process. +. The Govern!ent while no!inating directors on the Boards of public sector banks should be guided by certain broad ,fit and proper, nor!s for the Directors. The criteria suggested by the B'& !ay be suitably adopted for considering -fit and proper, test for bank directors. .. /or assessing integrity and suitability" factors such as cri!inal records" financial position" civil actions undertaken to pursue personal debts" refusal of ad!ission to" or e$pulsion fro! professional bodies" sanctions applied by regulators or si!ilar bodies" and previous )uestionable business practices" etc. should be considered. 0. The appoint!ent 1 no!ination of independent 1 non-e$ecutive directors to the Boards of banks 2both public sector and private sector3 should be fro! a pool of professional and talented people to be prepared and !aintained by Reserve Bank of 'ndia. 4ny deviation fro! this procedure by any bank should be with the prior approval of RB'. 5. 'n the present conte$t of banking beco!ing !ore co!ple$ and knowledge-based" there is an urgent need for !aking the Boards of banks !ore conte!porarily professional by inducting technical and specially )ualified individuals. 6. 7hile continuing regulation based representation of sectors like agriculture" &&'" cooperation" etc" efforts should be ai!ed at co!bining it with the need-based representation of skills such as !arketing" technology 8 syste!s" risk !anage!ent" strategic planning" treasury operations" credit recovery" etc." /urther" the Boards of banks should also have representation in the areas such as finance" infor!ation technology" hu!an resources develop!ent" econo!ics and persons with good track record of e$perience in !anaging 1 advising industrial enterprises.

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9. The independent 1 non-e$ecutive directors should raise in the !eetings of the Board" critical )uestions relating to business strategy" including loans 8 recovery policy" housekeeping and internal control syste!s" record of e$posure to various sectors 1 industries by way of both credit and invest!ent" risk !anage!ent syste!s" internal audit" accounting policy" senior !anage!ent develop!ent" other i!portant aspects of the functioning of the bank and investor relations. The good corporate governance in banks will be sustained by a knowledgeable" skillful and well infor!ed Board of Directors with a proper blend of e$pertise 1 professionalis!" independence and involve!ent. 1:. 'n the case of private sector banks where pro!oter directors !ay act in concert" the independent 1 non-e$ecutive directors should provide effective checks and balances ensuring that the bank does not build up e$posures to entities connected with the pro!oters or their associates. The independent 1 non-e$ecutive directors should provide effective checks and balances particularly" in widely held and closely controlled baking organisations. 11. Directors on the boards of *B/Cs !ay be per!itted to beco!e 'ndependent 1 non-e$ecutive directors on the boards of banks" sub;ect to certain conditions. 1%. <very Director should be given a brief on the functioning of the bank" before his appoint!ent 1 induction" covering various aspects of structure 1 functioning of the bank. 1(. The Board should for!ulate policies relating to credit dispensation" particularly in regard to e$posure to various productive sectors" geographical areas" invest!ents" e$posures to sensitive sectors such as capital !arket" strategies for recovery of loans and status of progress with respect to invest!ents" risk !anage!ent" etc. 1+. The directors could be !ade !ore responsible to their organisation by e$posing the! to need-based training progra!!es 1 se!inars 1 workshops to ac)uaint the! with e!erging develop!ents 1 challenges facing the banking sector. Reserve Bank as the Regulator" could take the initiative to organi#ing such se!inars. 1.. The whole-ti!e directors should have sufficiently long tenure to enable the! to leave a !ark of their leadership and business acu!en on the bank=s perfor!ance. 10. Reserve Bank !ay bring out an updated charter indicating clear-cut" specific guidelines on the role e$pected and the responsibilities of the individual directors. 15. 4s a step towards effective corporate governance" it would be desirable to take an undertaking fro! every director to the effect that they have gone through the guidelines defining the role and responsibilities of directors" and understood what is e$pected of the! and enter into a covenant to discharge their responsibilities to the best of their abilities" individually and collectively. 16. The e$isting level of re!uneration paid 2by way of sitting fees" etc.3 to directors of banks and financial institutions is grossly inade)uate" by conte!porary standards" to attract )ualified professional people to their boards" and e$pect the! to discharge their duties as per the !utually agreed covenants. 'n order to attract )uality professionals" the level of re!uneration payable to the directors should be co!!ensurate with the ti!e re)uired to be devoted to the bank-s work as well as to signal the appropriateness of re!uneration to the )uality of inputs e$pected fro! a !e!ber. The re!uneration of the directors !ay also include the for! of stock option. 19. 't would be desirable to separate the office of Chair!an and >anaging Director in respect of large si#ed public sector banks. This functional separation will bring about !ore focus on strategy

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and vision as also the needed thrust in the operational functioning of the top !anage!ent of the bank. %:. The statutory prohibition under section %: of the Banking Regulation 4ct" 19+9 on lending to co!panies in which the director is interested" severely constricts availability of )uality professional directors on to the Boards of banks. 'nternationally" however" banks are per!itted to e$tend credit facilities to co!panies in which the directors are interested sub;ect to full disclosure and appropriate covenants. This would re)uire a change in the e$isting legal fra!ework. 7e need to !ove towards this goal. %1. The infor!ation furnished to the Board should be wholeso!e" co!plete and ade)uate to take !eaningful decisions. 4 distinction needs to be !ade between statutory ite!s and strategic issues in order to !ake the !aterial for directors -!anageable-. The !anner in which the Board proceedings are recorded and followed up in public sector banks leaves !uch scope for i!prove!ent. The Reviews dealing with various perfor!ance areas could be put up to the &upervisory Co!!ittee of Board and a su!!ary of each such review could be put up to the >ain Board. The Board-s focus should be devoted !ore on strategy issues" risk profile" internal control syste!s" overall perfor!ance of the bank" etc. %%. The procedure followed for recording of the !inutes of the board !eetings in banks and financial institutions should be unifor! and for!alised. Banks and financial institutions !ay adopt two !ethods for recording the proceedings vi#." a su!!ary of key observations and a !ore detailed recording of the proceedings. 'n every !eeting" the board should review the status of the action taken on the points arising fro! earlier !eetings and till action is co!pleted to its satisfaction? the pending ite!s should continue to be put up before the board. %(. 't would be desirable if the e$posures of a bank to stockbrokers and !arket-!akers as a group" as also e$posures to other sensitive sectors" vi#." real estate etc. are reported to the Board regularly. The disclosures in respect of the progress !ade in putting in place a progressive risk !anage!ent syste!" the risk !anage!ent policy" strategy followed by the bank" e$posures to related entities" the asset classification of such lendings 1 invest!ents etc. confor!ity with Corporate Governance &tandards etc." be !ade by banks to the Board of Directors at regular intervals as prescribed. %+. 4ll banks should consider appointing )ualified Co!pany &ecretary as the &ecretary to the Board and have a Co!pliance @fficer 2reporting to the &ecretary3 for !onitoring and reporting co!pliance with various regulatory 1 accounting re)uire!ents. %.. There could be a &upervisory Co!!ittee of the Board in all banks" be they public or private sector" which will work on collective trust and at the sa!e ti!e" without diluting the overall responsibility of the Board. Their role and responsibilities could include !onitoring of the e$posures 2credit and invest!ent3 review of the ade)uacy of risk !anage!ent process 8 upgradation thereof" internal control syste!s and ensuring co!pliance with the statutory 1 regulatory fra!ework. %0. The 4udit Co!!ittee should" ideally be constituted with independent 1 non-e$ecutive directors and the <$ecutive Director should only be a per!anent invitee. Aowever" in respect of public sector banks" the e$isting arrange!ent of including the <$ecutive Director and no!inee directors of Govern!ent and RB' in the 4udit Co!!ittee !ay continue. %5. The Chair!an of 4udit Co!!ittee need not be confined to the Chartered accountant profession but can be a person with knowledge on Bfinance= or -banking- so as to provide directions and guidance to the 4udit Co!!ittee" since the Co!!ittee not only looks at accounting issues" but also the overall !anage!ent of the bank.

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%6. 't is desirable to have a *o!ination Co!!ittee for appointing independent 1 non-e$ecutive directors of banks. 'n the conte$t of a nu!ber of public sector banks issuing capital to the public" a *o!ination Co!!ittee of the Board !ay be for!ed for no!ination of directors. representing shareholders. %9. 7ith a view to building up credibility a!ong the investor class" the Group sreco!!ends that a Co!!ittee of the Board !ay be set up to look into the grievances of investors and shareholders" with the Co!pany &ecretary as a nodal point. (:. The for!ation and operationalisation of the Risk >anage!ent Co!!ittees in pursuance of the guidelines issued by the RB' should be speeded up and their role further strengthened. (1. The banks could be asked to co!e up with a strategy and plan for i!ple!entation of the governance standards reco!!ended and sub!it progress of i!ple!entation" for review after twelve !onths and thereafter half yearly or annually" as dee!ed appropriate.

Chapter 1 - Introduction Bac ground

1.1. The recent develop!ents provide a!ple evidence that inade)uate corporate governance standards in certain banks and financial institutions could contribute to their financial fragility. The develop!ents in the &outh - <ast 4sian countries in 1995-96 bring out clearly the need for for!al governance standards in the corporate and financial sectors. The inade)uate governance standards in the corporate sector raises the risk profile of co!panies and e$pose the relevant banks and other lending institutions to greater potential default. The adherence to for!al 2or !andated3 corporate governance practices are particularly crucial for banks as weak or inade)uate corporate governance standards invariably result in ineffective risk !anage!ent and ulti!ately to financial instability. 'n the case of banks" the develop!ents in one bank !ay trigger syste!ic conse)uences. The essence of for!al corporate governance in banking institutions are" therefore" the responsibility of the Board and its independent Co!!ittees for providing ade)uate checks and balances" transparency and disclosures" robust risk !anage!ent syste!s" risk contain!ent procedures" early warning syste!s and pro!pt corrective actions to avoid default. 1.%. The recent develop!ents in the country have brought to the fore the need for Boards of banks and financial institutions to ensure appropriate organisational !echanis!s regarding the functioning of banks and other financial institutions. The >id-ter! Review of >onetary and Credit Colicy for the year %::1-:% announced on @ctober %%" %::1 noted that although as part of the on-going financial sector refor!s" !uch greater autono!y and powers have been entrusted to the Boards of banks and financial institutions to lay down effective internal guidelines and procedures to enhance transparency" disclosure" risk and asset-liability !anage!ent ? yet" it has been noticed that in so!e cases" the policy laid down by the Boards was either flouted with i!punity" or the Board itself had failed to for!ally lay down appropriate internal guidelines for !ini!ising risks and over-lending to certain entities" without ade)uate security. The >id-ter! Review" therefore" noted that if proble!s of the type which have surfaced" recently" are to be avoided in the future" within the fra!ework of a growing deregulated and liberal financial syste!" the role of Boards beco!es crucial. 'n the above backdrop" the Consultative Group of Directors of banks and financial institutions was set up by the Reserve Bank in consultation with 'B4" with the following ter!s of referenceD 2a3 To review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis- -vis co!pliance" transparency" disclosures" audit co!!ittees" etc.

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2b3 To study the syste! prevalent in banks 1 financial institutions for !onitoring by the Board" the i!ple!entation of the policies laid down by it. 2c3 To !ake reco!!endations for !aking the role of Board of Directors !ore effective with a view to !ini!ising risks and over-e$posure. 2d3 4ny other !atter relevant to the sub;ect. The details of the constitution of the Group are furnished in 4nne$ure 1.

Chapter ! - "#servations and Recommendations of the Group

Board of $irectors Constitution of the Board +.1. The Board of Directors has i!portant fiduciary responsibilities to the shareholders of the co!pany. The Board is responsible for the overall !anage!ent and effective functioning of the bank. The banks" being a corporate entity" the Board of a bank is responsible to the shareholders. /urther" banks being i!portant participants in the pay!ent syste!s" it is en;oined upon the Boards to safeguard the interests of the depositors and other stakeholders. The Board" however" cannot be e$pected to supervise the day-to-day operations of the bank and it" therefore" delegates and entrusts appropriate authority to the various functionaries" via the whole -ti!e directors of the Board such as" Chair!an" >anaging Director and <$ecutive Directors. This !akes each whole-ti!e director" individually" and the Board" collectively" responsible for the perfor!ance of the bank. +.%. The challenge facing the 'ndian banking has been getting the board of directors to shape strategy and !onitor perfor!ance without encroaching on !anage!ent terrain or beco!ing too involved in the bank-s day-to-day operations. +.(. The Group notes that the statutes governing public sector banks vest powers with the Central Govern!ent to appoint whole-ti!e directors as also !a;ority of the independent 1 non-e$ecutive directors. The Boards of public sector banks 2barring &tate Bank of 'ndia3 co!prise presently" two whole-ti!e directors 2one Chair!an 8 >anaging Director and one <$ecutive Director3. Considering the fact that banking is beco!ing !ore co!ple$" the Group is of the view that one !ore whole-ti!e director should be appointed on the Boards of large-si#ed nationalised banks" who could provide undivided attention to critical areas like risk !anage!ent syste!s" hu!an resource !anage!ent" etc. +.+. The eligibility criteria nor!ally followed for no!ination of independent directors to the Boards of public sector banks are the followingD The candidate should nor!ally be a graduate 2which can be rela$ed while selecting directors for the categories of far!ers" depositors" artisans" etc.3 Ae 1 she would be between (. and 0. years of age. Ae 1 she should not be a >e!ber of Carlia!ent 1>e!ber of Eegislative 4sse!bly1>e!ber of Eegislative Council

The Group is of the view that the above criteria needs to be revised in view of challenges facing the banking sector.

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+... Cresently" the due diligence is done" to a li!ited e$tent" by the Reserve Bank of 'ndia for the candidates considered for independent 1 non-e$ecutive directorship in public sector banks. The due diligence by RB' is" however" confined to verifying whether the na!es forwarded by the Govern!ent of 'ndia figure in the Defaulters- Eist or not. This due diligence process does not assess either the ability" professional )ualification or the technical co!petence of the candidates being considered for directorship to fulfil the fiduciary responsibilities e$pected of the!. +.0. 'n the case of independent 1 non-e$ecutive directors of private sector banks" since they are appointed by the Board" the due diligence e$ercise is not done by RB'. &uch directors are appointed by the Board keeping in view the re)uire!ent of giving representation to the specified sectors" as enshrined in the Banking Regulation 4ct" 19+9. +.5. The Group reco!!ends that the criteria followed by the Govern!ent of 'ndia for no!inating directors to the Boards of public sector banks and the due diligence followed for the! should be !ade applicable to independent 1 non-e$ecutive directors of other banks as well. +.6. The Group is of the view that due diligence of the directors of all banks -be they in public sector or private sector should be done in regard to their suitability for the post by way of )ualifications and technical e$pertise. The Group strongly feels that involve!ent of *o!ination Co!!ittee of the Board in such an e$ercise should be seriously considered as a for!al process. The final decision in respect of appoint!ent of independent 1 non-e$ecutive directors should be that of the Board with the *o!ination Co!!ittee presenting its reco!!endations highlighting both positive and negative aspects of each reco!!ended candidate" for consideration of the Board. +.9. 7hile the desirable international practice of the Board !e!bers being no!inated by the *o!ination Co!!ittee fro! a list of )ualified" e$perienced professionals would re)uire a!end!ents to the banking laws" the Group reco!!ends that the Govern!ent while no!inating directors on the Boards of public sector banks should be guided by certain broad ,fit and proper, nor!s for the directors. The Group reco!!ends the criteria suggested by the B'& to consider -fit and proper, for bank directorsD Co!petence of the individual directors as assessed in ter!s of for!al )ualifications" previous e$perience and track record. 'ntegrity of the candidates.

/or assessing integrity and suitability" the features like cri!inal records" financial position" civil actions undertaken to pursue personal debts" refusal of ad!ission to" or e$pulsion fro! professional bodies" sanctions applied by regulators or si!ilar bodies" and previous )uestionable business practices" etc. should be considered. 2cf" "Supervision of Financial Conglomerates", 1996" BCB&3. The Group reco!!ends that these criteria should also be !ade applicable to no!ination of independent directors of private sector banks. +.1:.The Group reco!!ends that a pool of professional and talented people should be built up for consideration of no!ination as independent 1 non-e$ecutive directors to the Board of banks and financial institutions. The list of such eligible directors should be asse!bled by RB' fro! independent sources after proper due diligence and such a list should be put on the RB'=s website for access by all concerned. The Group is of the view that appoint!ent 1 no!ination of independent 1 non-e$ecutive directors to the Boards of banks 2both public sector and private sector3 should be fro! this list. 4ny deviation fro! this procedure by any bank" according to the Group" should be with the prior approval of RB'. RB' !ay also establish procedures for regularly updating the list through additions and deletions fro! ti!e to ti!e. Composition of the Board

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+.11.The Group e$a!ined the structure and the co!position of the Boards of banks. 't is noted that co!position of the Boards of banks is !ore regulation-based rather than need-based. 4s noted in paragraph %.% above" as per the regulation applicable to banks" the Board of Directors of a bank is re)uired to have representation fro! specific sectors like agriculture and rural econo!y" co-operation" &&'" law" etc." The Group is of the view that in the conte$t of banking beco!ing !ore co!ple$ and co!petitive" the co!position of the Board should be left to the business needs of banks. Co!position of the Board 2by way of representation of various sectors3 should be so as to reflect the business strategy and its vision for the future. +.1%.The Group is of the view that in the present conte$t when banking is beco!ing !ore co!ple$ and knowledge-based" there is an urgent need for !aking the Boards of banks !ore conte!porarily professional" by inducting technical and specially )ualified personnel. The earlier re)uire!ent of ensuring representation on the Boards of banks for areas like agricultural sector" law" co-operation" s!all-scale industry" etc. which were relevant in the i!!ediate postnationalisation era" in the Group-s view" have now to be supple!ented by other e!erging priorities. The Group feels that instead of atte!pting to wholly change sectoral representation" efforts should be ai!ed at bringing about a blend of %historical s ills& set 2that is" regulationbased representation of sectors like agriculture" &&'" co-operation" etc.3 and the B ne' s ills& set 2that is" need-based representation of skills such as" !arketing" technology and syste!s" risk !anage!ent" strategic planning" treasury operations" credit recovery" etc.3. +.1(.'t was recognised that agriculture still contributes a significant share of GDC and representation to agriculture and &&'" etc." sectors have to be continued. 7ith increased deregulation and the structural changes that have taken place in the econo!y and in the banking sector" the Group is of the view that the Boards of banks should have representation in the following areasD /inance 'nfor!ation Technology Au!an Resources Develop!ent Cersons with good track record of e$perience in !anaging 1 advising industrial enterprises <cono!ics

Independent ( non-executive directors +.1+.The independent 1 non-e$ecutive directors in any organi#ation have a constructive role to play both on-and-off-the Board because of their knowledge and professional ob;ectivity. 7ithin the e$isting legal fra!ework" the Group is of the view that the independent 1 non-e$ecutive directors !ust play a !ore pro-active role by e$ercising their independence of ;udge!ent" practical e$perience" specialised knowledge" etc. to the deliberations of the Board. The independent 1 non-e$ecutive directors have a pro!inent role in introducing and sustaining a proactive governance fra!ework in banks and financial institutions. The independent 1 non-e$ecutive directors" according to the Group" should provide constructive inputs regarding the business strategy" perfor!ance of the bank" etc. They should act as the catalyst for focussed discussions on issues brought to the Board and sub;ects of critical i!portance to the bank during the !eetings of the Board. These directors" being independent" are e$pected to be free fro! any organisational affiliation and should seek all infor!ation which are relevant to !onitor the perfor!ance of the bank" the overall risk profile of its credit and invest!ent portfolios" cases of over-e$posure to one or a particular group of borrowers or entities related 1 associated with the pro!oter directors" etc. 4ccording to the Group" the independent 1 non-e$ecutive directors should raise in the !eetings of the Board" critical )uestions relating to business strategy" including loans and recovery policy"

house keeping and internal control syste!" record of e$posure to various sectors 1 industries by way of both credit and invest!ents" etc. risk !anage!ent syste!s" internal audit" accounting policy" senior !anage!ent develop!ent" other aspects of the functioning of the bank" and investor relations.

The independent 1 non -e$ecutive directors need to ensure that the vital issues raised by the! are addressed by the bank to the full satisfaction of the Board. 7hile !aking the above reco!!endations" the Group is guided by the fact that good corporate governance in banks will be sustained by a knowledgeable" skilful and well infor!ed Board of Directors with a correct blend of e$pertise 1 professionalis!" independence and involve!ent. +.1.. 'n the case of private sector banks where pro!oter directors !ay act in concert" the independent 1 non-e$ecutive directors should provide effective checks and balances ensuring that the bank does not build up e$posures to entities connected with the pro!oters or their associates. They should also seek through the Board" all infor!ation relating to critical areas like connected lending" invest!ents" e$posure to entities 1 associates related to the pro!oters1 large shareholders. The independent 1 non-e$ecutive directors should provide effective checks and balances" particularly" in widely held and closely controlled banking organisations. Commonality of directors of #an s and )B*Cs +.10. 'n regard to the e$isting regulatory prohibition on directors of *B/Cs beco!ing independent 1 non-e$ecutive directors on the boards of banks" the Group is of the view that it would not be proper to debar a professional director on the board of an *B/C fro! beco!ing a director on the board of a bank. 't needs to be noted that as per the e$isting policy" *B/Cs satisfying certain criteria 2such as" 444 rating" !ini!u! net worth of Rs. %:: crore" CR4R of not less than 1%F" net *C4 not !ore than .F" etc.3 are allowed to be converted to a bank. 'n view of the above policy stance" the Group feels that it would not be fair to debar directors on the boards of *B/Cs beco!ing independent 1 non-e$ecutive directors on the boards of banks. 'n order to avoid any likely conflict of interest" the Group reco!!ends that a director on the board of a *B/C could be considered for appoint!ent as director on the board of a bank if 2i3 Ae1she is not the owner of the *B/C" Gi.e." holdings 2single or ;ointly with relatives" associates" etc. 3 e$ceeding .:FH or 2ii3 Ae1she is not related to the pro!oter of the *B/C" or 2iii3 Ae1she is not full-ti!e e!ployee in the *B/C. 'n regard to full-ti!e e!ployees of *B/Cs" the Group feels that the Reserve Bank of 'ndia as the regulator" should have the discretion for considering such person for directorship in a bank" keeping in view the specific circu!stances" !erits " etc. of each case. Responsi#ilities of directors +.15. 4 strong corporate board perfor!s four !a;or rolesD over-seeing the risk profile of a co!pany" !onitoring the integrity of its business and control !echanis!s" ensuring that e$pert !anage!ent is in place and !a$i!ising the interests of its stakeholders. &uch board has regular

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and close contact with the organisation and can detect and correct any abnor!al behaviour )uickly. &uch a board is also able to play a crucial role in hiring and retaining sound !anagers. The Group is of the view that banks being pivotal for the country-s financial syste!" the boards of banks should fulfil all these four roles. +.16. The Board of Directors of banks and financial institutions have" besides fiduciary obligations" as above" i!portant social responsibilities" and the responsibilities to ensure co!pliance with the regulatory fra!ework. These would include co!pliance with the directions 1 policy of the Govern!ent etc. 'n their fiduciary capacity" the Boards of directors should receive regular reports fro! their !anage!ent co!!ittees" auditors and audit co!!ittee" for!ulate clear written policies in regard to various business strategies and policies 2credit" invest!ents" etc.3" perfor!ance para!eters for the bank and ensure that the bank=s affairs are conducted in accordance with the stated policies 1 regulatory re)uire!ents. The Board should for!ulate policies relating to credit dispensation particularly in regard to e$posures to various productive sectors" geographical areas" invest!ents" e$posures to sensitive sectors such as capital !arket" strategies for recovery of loans and status of progress with respect to invest!ents" risk !anage!ent" etc. +.19. The need for clear lines of responsibilities in any organisation cannot be overe!phasised. 'n the case of banks" the Group notes that the responsibilities are well defined for the !anagerial functionaries. Cowers are delegated to the various functionaries of the bank for sanctioning of loans and advances" invest!ents" incurring authorised level of e$penditure" etc. The !anagerial functionaries are also !ade accountable and their perfor!ance is !onitored vis- -vis the perfor!ance targets agreed to by the Board" ;udicious e$ercise of discretionary powers" etc. +.%:. The Group reco!!ends that every director should be given a brief on the functioning of the bank" before his appoint!ent 1 induction" covering the followingD Delegation of various authorities by the Board &trategic Clan of the bank @rganisational &tructure /inancial and other controls and syste!s <cono!ic features of the !arket and co!petitive environ!ent" and >eeting with key !anage!ent tea! after briefing.

+raining to directors +.%1. The Group is of the view that the directors could be !ade !ore responsible to their organisations by e$posing the! to need-based training progra!!es 1 se!inars 1 workshops to ac)uaint the! with the e!erging develop!ents 1 challenges facing the banking sector. The directors could be e$posed to the latest !anage!ent techni)ues" technological develop!ents" innovations in financial !arkets" risk !anage!ent and other areas of interest to the organisation to discharge their duties to the best of their abilities. The Group is of the view that such invest!ent would be of great value to the financial syste!. 'deally" in the Group-s view" the Reserve Bank of 'ndia as the Regulator" could take the initiative in organising such se!inars for the directors of banks and financial institutions. +.%%. The Group notes that broad guidelines have been issued both by the Govern!ent of 'ndia and the Reserve Bank in regard to the role e$pected of their no!inees on the Boards of banks. These guidelines e!phasise the following pointsD

The director is e$pected to regularly attend board !eetings and take an active part in its deliberations. >e!bers of the Board do not e$ercise any e$ecutive authority individually" but are collectively responsible for the superintendence" direction and !anage!ent of the bank. 7hile directors can delegate certain powers to any co!!ittees" e$ecutives or other officers" they cannot absolve the!selves of their responsibility of ensuring that the bank operates on sound and prudent lines. They are responsible for safeguarding the interests of the depositors and owners through efficient and well infor!ed ad!inistration of the bank. Directors are e$pected to critically and thoroughly study agenda papers. They should pay ade)uate attention to the state of non-perfor!ing assets" recovery perfor!ance and write-off of large debts 2say Rs. 1 crore or !ore3.

Based on the !eetings attended by the!" the no!inee directors are re)uired to sub!it reports to the Govern!ent 2in the case of its no!inees of the Boards of public sector banks3 and to Reserve Bank of 'ndia 2in respect of its no!inees on the Boards of all banks3. +.%(. Cresently" there is no !echanis! to !ake the directors on the Boards of banks and financial institutions accountable for the perfor!ance of their organisation. The Group is of the view that the lack of clearly docu!ented responsibility and accountability of directors on the Board ste!s fro! the !anner in which the Board is constituted. 'n the case of public sector banks" !a;ority of the Board co!prises no!inees of the Central Govern!ent and the individual directors are" therefore" !ainly accountable to the political institution of the land. The Group is of the view that while a change in the !anner in which the Boards are constituted is essential in order to !ake the Board and its individual !e!bers !ore accountable" this would necessitate a change in the statutes governing the banking sector. 4ccording to the Group" the role of C<@s their track record" co!petence and leadership )ualities provides the pivot for good governance practices in a banking co!pany. The process of selection of the C<@" therefore" assu!es crucial i!portance in the endeavor to introduce !odern corporate governance standards in banks. +.%+. The Group is of the view that it would be desirable to separate the office of Chair!an and >anaging Director in respect of large si#ed banks. Ieeping in view the balance sheet si#e" sophistication of business transactions and co!ple$ity of the bank" the office of Chair!an and >anaging Director could be bifurcated into two D the Chair!an who is the Chair!an of the board and the >anaging Director who could function as the Chief <$ecutive responsible for day-to-day !anage!ent of the bank. The Group is of the view that this functional separation will bring about !ore focus and vision as also the needed thrust in the functioning of the top !anage!ent of the bank. +.%.. The Group notes that !any <$pert Co!!ittees 2including the Co!!ittee on Banking &ector Refor!s under Chair!anship of &hri >.*arasi!ha!3 had reco!!ended in favour of a reasonably long tenure of services for the whole-ti!e directors. The Group reco!!ends that the whole-ti!e directors should have sufficiently long tenure so as to enable the! to leave a !ark of their leadership and business acu!en on the bank=s perfor!ance. +.%0. 7hile the responsibilities of no!inee directors have been clearly laid down" the responsibilities of the Board of Directors as a whole has not been delineated. /urther!ore" there is no practice of advising the directors 2other than no!inee directors3 of banks their responsibilities" role" etc. in the organi#ation. The Reserve Bank of 'ndia had circulated in 196+

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a!ong the private sector banks" guidelines on the role and functions of independent 1 none$ecutive directors on the Boards of private sector banks. These guidelines were in the nature of operational guidelines bringing ho!e to the! the fact that the directors should not interfere in day-to-day affairs of the bank or otherwise intervene in credit 1 invest!ent 1 personnel 1 other operational !atters. The guidelines highlight the need for the independent 1 non-e$ecutive directors to take interest in the banks- work concerning their own fields of specialisation 1 activity and also deliberate on all !atters of general policy affecting the bank-s functioning. The guidelines e$hort that every director should function in a !anner !ost conducive to the interests of the depositors" of the shareholders and of the nation as a whole. The Reserve Bank of 'ndia had also circulated in 199% a list of ,do-s, and ,don=ts, to the private sector banks" with a view to sensitising the directors on their role and responsibilities. 4 si!ilar list had also been given by the Govern!ent to the directors of public sector banks. The Group reco!!ends that these instructions !ay be reviewed and updated where re)uired" and the roles and responsibilities of independent 1 non-e$ecutive directors be clearly stated. +.%5. Ieeping in view the recent develop!ents and the changes witnessed in the banksoperations" as also the technical develop!ents" the Group suggests that Reserve Bank !ay bring out an updated charter indicating clear-cut" specific guidelines on the role e$pected and the responsibilities of the individual directors. The responsibilities of the directors according to the Group" should illustratively include the followingD Deliberating and approving the ob;ectives" business strategies and annual business plans Deliberating and approving the !anage!ent succession policy of the institution" and assessing senior !anage!ent-s perfor!ance on an on-going basis" Clearly defining the authorities and responsibilities of both e$ecutive directors and relevant senior !anage!ent" Developing and providing a list of checks and balances for use by senior !anage!ent" /or!ulating policies on vital areas of bank-s functioning 2vi#." loan and recovery policy" invest!ent policy" risk !anage!ent policy" e$posure to sensitive sector including capital !arket" etc.3 Guidance on risk !anage!ent particularly invest!ent assess!ent" the fi$ation of risk li!its" e$posure ceiling both individual and group J borrower ceilings" etc." 4pprove the policy on introduction of technology to the bank=s various facets of working with a view to provide better service in a !ost cost effective !anner as !easured by targets of productivity and profitability >aintaining and recording appropriate levels of checks and balances with regard to the influence of the !anage!ent and1or large shareholder2s3. >onitoring on an on-going basis the bank=s perfor!ance" build up of e$posure to various categories of borrowers" industries" sectors" etc against targets of the annual operating plan. Discussing the reports sub!itted by the 4udit Co!!ittee" !onitoring the follow up action taken to rectify the deficiencies observed" etc. <nsuring co!pliance with all legal 1 regulatory re)uire!ents" etc.

+.%6. 4s a step towards effective corporate governance" the Group is of the view that it would be desirable to take an undertaking fro! every director to the effect that they have gone through the guidelines defining the role and responsibilities of directors" and understood what is e$pected of the! and enter into a covenant to discharge their responsibilities to the best of their abilities" individually and collectively. 'n this connection" the Group would reco!!end that before appoint!ent of a director" a )uestionnaire on the lines of the one used by the /&4 of KI" !odified keeping in view of our re)uire!ents could be used as a !odel 24nne$ure %3 for obtaining relevant infor!ation regarding background of the potential appointee.

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+.%9. The Group is of view that in consonance with transparency in regard to responsibility of directors" an appropriate covenant should be obtained fro! each of the directors" whether they are independent 1 non-e$ecutive directors 1 no!inees of Govern!ent 1 RB' 1 other institutions having si#able shareholding in banking organisations. The Group accordingly has devised a covenant for adoption by all the banks. 4 copy of the for!at is given in 4nne$ure(. Remuneration to directors +.(:. The Group is of the view that the e$isting level of re!uneration paid 2by way of sitting fees" etc.3 to directors of banks and financial institutions is grossly inade)uate" by conte!porary standards" to attract )ualified professional people to their Boards" and e$pect the! to discharge their duties as per the !utually agreed covenants. 4 few of the banks 1 /'s have !odified their co!pensation plans to include a base salary" perfor!ance bonus and options to their directors. 'n order to get )uality professional people" the level of re!uneration payable to the directors should be co!!ensurate with the ti!e re)uired to be devoted to the bank-s work and also to signal the appropriateness of re!uneration to the )uality of inputs e$pected fro! a !e!ber. The re!uneration of the directors !ay also include the for! of stock option. ,rohi#itions flo'ing from Section -. of the B/R/ 0ct1 12!2 +.(1. The Group is of the view that the statutory prohibition under section %: of the Banking Regulation 4ct" 19+9 on lending to co!panies in which a director is interested" severely constricts availability of )uality professional directors on to the Boards of banks. The Group notes that internationally" however" banks are per!itted to e$tend credit facilities to co!panies in which the directors are interested sub;ect to full disclosure and appropriate covenants. The Group is aware that any change in the e$isting legal fra!ework would re)uire an a!end!ent to the Banking Regulation 4ct. The Group reco!!ends that we !ove towards that goal. Information flo' to ( from the Board +.(%. The Group notes that the effectiveness of the Boards largely depends upon the flow of infor!ation to and fro! the Board. The infor!ation furnished to the Board should be wholeso!e and co!plete and should be ade)uate to take !eaningful decisions. 4 distinction needs to be !ade between statutory ite!s and strategic issues in order to !ake the !aterial for directors B!anageable=. 'n this conte$t" the Group reviewed the practices of banks and financial institutions in regard to preparation of the agenda notes" recording of the proceedings of the !eeting of the Board" follow up of various action points arising fro! the decision taken at the !eetings" etc. The Group noted that the !anner in which the proceedings are recorded and followed up in public sector banks leave !uch scope for i!prove!ent. +.((. 4n issue that was brought to the notice of the Group was the nu!ber of reviews put up to the Board as per the Calendar of Reviews prescribed by the Reserve Bank of 'ndia. 't is was pointed out that the large nu!ber of reviews put up to the Board leaves little ti!e to the Board for fruitful discussions on future business strategies and policies. The Group reco!!ends that the Reviews dealing with various perfor!ance areas could be put to the &upervisory Co!!ittee of Board and a su!!ary on each of the reviews could be put up to the >ain Board. The Board-s focus should be !ore on strategy issues" risk profile" internal control syste!s" overall perfor!ance of the bank" etc. +.(+. The Group is of the view that the procedure followed for recording of the !inutes of the Board !eetings in banks and financial institutions should be unifor! and for!alised. The Group would suggest that banks and financial institutions !ay adopt two !ethods for recording the

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proceedingsD 4 su!!ary of key observations !ade which should be sub!itted to the ne$t Board !eeting and a !ore detailed recording of the proceedings which will clearly bring out the observations" dissents" etc. !ade by the individual directors could be forwarded to the! for their confir!ation. +.(.. The Group is of the view that the draft !inutes of the !eeting should be forwarded to the directors" preferably via the electronic !edia" within +6 hours of the !eeting and ratification obtained fro! the directors within a definite ti!e fra!e. 'f a director fails to respond within the ti!e specified" it should be taken that he 1 she has no co!!ents to offer. +.(0. 'n every Board !eeting" the Board should review the status of the action taken on the points arising fro! the earlier !eetings and till action is co!pleted to the satisfaction of the Board" any pending ite! should continue to be put up before the Board. Company Secretary +.(5. The Group noted that the public sector banks do not have a )ualified Co!pany &ecretary on their rolls. 4 Co!pany &ecretary has i!portant fiduciary and Co!pany Eaw responsibilities. The Co!pany &ecretary is the nodal point for the Board to get feedback on the status of co!pliance by the organisation in regard to provisions of the Co!pany Eaw" Eisting 4gree!ents" &<B' Regulations" &hareholder grievances" etc. +.(6. The Cublic &ector banks historically had no )ualified Co!pany &ecretary. 'n the conte$t of a nu!ber of banks in the public sector accessing the capital !arket" the Group is of the view that there is now a need to have a )ualified Co!pany &ecretary in order to ensure that the bank is in co!pliance at all ti!es with the co!pany law related issues as also to be instru!ental in redressing grievances of the investors. 4 )ualified Co!pany &ecretary" according to the Group" would also fulfil the earlier reco!!endation in regard to recordings of the proceedings of the !eetings of the Board and its Co!!ittees. The Group reco!!ends that all banks should consider appointing )ualified Co!pany &ecretary as the &ecretary to the Board and have a Co!pliance @fficer 2 reporting to the &ecretary3 for ensuring co!pliance with various regulatory 1 accounting re)uire!ents. /urther" the 'nstitute of Co!pany &ecretaries of 'ndia !ay be re)uired to include appropriate inputs in their curriculu! as part of the professional e$a!ination. Committees of the Board 314 Supervisory Committee +.(9. 4n issue raised during the deliberations of the Group was whether an additional tier by way of &upervisory Board could be considered for banks" a practice which is followed by banks in Ger!any. The &upervisory Boards of banks in Ger!any !ainly function as ,<$ecutive Co!!ittees, of the Board. The public sector banks in 'ndia have constituted ,<$ecutive Co!!ittee, or ,>anage!ent Co!!ittee, which !eet !ore fre)uently than the full Board do. The Group is of the view that instead of creating another tier by way of a &upervisory Board" there could be a Supervisory Committee of the Board in all banks - be they public or private sector" which will work on collective trust and at the sa!e ti!e" without diluting the overall responsibility of the Board. The role and responsibilities of the &upervisory Co!!ittee of the Board could include !onitoring of the e$posures 2both credit and invest!ent3 by the banks" review of the ade)uacy of the risk !anage!ent process and upgradation thereof" internal control syste!s and ensuring co!pliance with the statutory 1 regulatory fra!ework. 3-4 0udit Committee of the Board

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+.+:. The Group notes that banks have set up as re)uired in ter!s of the RB' guidelines" independent 4udit Co!!ittees. The 4udit Co!!ittee co!prises a !a;ority of the independent 1 non-e$ecutive directors with the <$ecutive Director of the bank as one of the !e!bers. The Group notes that a Chartered 4ccountant" wherever available on the board" is a !e!ber of the 4udit Co!!ittee. +.+1. The international best practice in this regard is to constitute 4udit Co!!ittees with only independent 1 non-e$ecutive directors. 4s regards the co!position of the 4udit Co!!ittee" the Basel Co!!ittee has suggested that in order to ensure its independence" the 4udit Co!!ittee of the Board should be constituted with e$ternal Board !e!bers who have banking or financial e$pertise. 2cf Enhancing Corporate Governance for Banking Organizations, Basel" &epte!ber 19993. The Group is of the view that ideally the 4udit Co!!ittee should be constituted with independent 1 non-e$ecutive directors and the <$ecutive Director should only be a per!anent invitee. Aowever" keeping in view that the present circu!stances" the e$isting arrange!ents where the <$ecutive Director is one of the !e!bers !ay continue? and !ay include the <$ecutive Director and official directors i.e." no!inee of Govern!ent of 'ndia and RB' in respect of public sector banks. +.+%. The Group is of view that the Chair!an of 4udit Co!!ittee need not be confined to the Chartered accountant profession but can be a person with knowledge of Bfinance= or -banking- so as to provide directions and guidance to the 4udit Co!!ittee since the Co!!ittee not only looks at accounting role but also the overall !anage!ent audit etc. of the bank. 354 )omination Committee +.+(. 4s already discussed in the paragraph +.6" the Group is of the view that it is desirable to have a *o!ination Co!!ittee for appointing independent 1 non-e$ecutive directors of banks that should scrutini#e the no!inations received for no!ination of independent 1 non-e$ecutive directors with reference to their )ualifications" e$perience and other criteria proposed above. The Group recogni#es that in the case of public sector banks" the no!ination co!!ittees !ay be of not i!!ediate relevance" since the independent 1 non-e$ecutive directors 2e$cept shareholder no!inees in the case of banks which have issued capital to the public3 are appointed by the Central Govern!ent. The Group is of the view that in the conte$t of a nu!ber of public sector banks issuing capital to the public" a *o!ination Co!!ittee of the Board !ay be for!ed for no!ination of directors representing shareholders. 3!4 Shareholders6 Redressal Committee +.++. &ince banks are increasingly accessing capital !arket" there is a need for an effective !achinery for redressal of investor grievances in banks. The Group notes that as of now" the !atters relating to investor co!plaints" etc. are looked after by the line staff. 7ith a view to building up credibility a!ong the investor class" the Group reco!!ends that a Co!!ittee of the Board !ay be set up to look into the grievances of investors and share holders" with the Co!pany &ecretary as a nodal point. 374 Ris 8anagement Committee +.+.. The Group notes that in pursuance of the Guidelines issued by the Reserve Bank of 'ndia" every banking organi#ation is re)uired to set up Risk >anage!ent Co!!ittees 2for !anage!ent of both credit risk and !arket risk3 with Board level representation to !anage effectively the risk profile of the bank. The !anage!ent of risk particularly arising fro! over e$posure to interconnected entities" ca!e to the fore in the recent past in respect of a few banks. The Group" therefore" reco!!ends that the for!ation and operationalisation of the Risk >anage!ent Co!!ittees should be speeded up and their role further strengthened.

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$isclosure and +ransparency +.+0. The Group notes that disclosure re)uire!ents for banks have been substantially enhanced in the recent period. Banks are now re)uired to disclose in the -*otes on 4ccounts-" e$posure to sensitive sectors as also e$posure to capital !arket by way of 2a3 direct invest!ent in shares and debentures" 2b3 advances against shares and debentures and 2c3 guarantees issued on behalf of stockbrokers. The Group suggests that it would be desirable if the e$posure of a bank to stockbrokers and !arket !akers as a group" as also e$posure to other sensitive sectors 2vi#." real estate3" e$posure to various sectors" etc. are reported to the Board regularly. +.+5. The Group reco!!ends that the following disclosures be !ade by banks to the board of directors at regular intervals as !ay be prescribed by the board fro! ti!e to ti!eD 2i3 The progress !ade in putting in place a progressive risk !anage!ent syste!" the risk !anage!ent policy and strategy followed by the bank. 2ii3 <$posure to related entities" vi#." details of lending to 1 invest!ent in subsidiaries" the asset classification of such lendings 1 invest!ent" etc. 2iii3 Confor!ity with Corporate Governance standards - structure" various co!!ittees" etc. Revie' of implementation +.+6. /or i!ple!entation of the reco!!endations !ade above" the Group suggests the following approach for adoptionD The banks could be asked to co!e up with a strategy for i!ple!entation of the governance standards reco!!ended. @nce the strategy is received fro! all banks" the progress of i!ple!entation could be reviewed after a period of twelve !onths. Thereafter" the position could be reviewed half-yearly or annually" as dee!ed appropriate.

Sd/ (Dr. A.S.Ganguly Chairman

sd/ (J.L.Saha)

Sd/ (Tarun Das)

sd/ (Janki Vallabh)

sd/ (D.Satwal kar)

sd/ (S.C.!adhwa)

sd/ (".V.#ndir san)

sd/ (Shail ndra Swaru$)

sd/ (".%.&hanna)

sd/ (S.&.'un(al)

sd/

sd/

(&.L.&h tra$aul)

('.%.Srini)asan) S *r tary.

' mb r