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EXECUTIVE SUMMARY
The banking scenario in India is changing fast to keep pace with the
international banking practice. As a result, the banks in India have been asked to
meet specific standards such as capital adequacy norms, classification of assets
and income recognition Norms etc.
The main objective of this project is to introduce about the corporate
governance and how the corporate governance workout in the Indian Banking
Sector. This project would also provide fundamental concepts to understand
about the corporate governance and Indian Banking System. The project covers
emergence of the concept of corporate governance, the manner in which it is
relates with banking sector, its various issues, constituents and how it is being
implemented in the banking sector. The focuses mainly on some specific
aspects of codes of corporate governance and is application in the banking
sector.
Though outcomes of good corporate governance remains same
irrespective of nature of business, type of ownership, quality of management,
business/legal regulations, and political environment, but the means to achieve
this good governance differs a lot based on the factors mentioned above. Some
of the parameters that may influence corporate governance include ownership
structure, board philosophy, industry segment, and maturity of business,
management process, level of competition, international business participation,
and
size
of
the
company.
Lot of effort is being put both nationally and internationally in understanding
and suggesting good practices that can improve governance of banking sector.
In India also several initiatives have been taken up in understanding nuances of
banking sector governance.
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INDEX
SR.
TOPIC
PAGE NO.
NO.
1]
CORPORATE GOVERNANCE
[MEANING, DEFINATION AND
CONCEPT]
2]
3]
4]
5]
6]
7]
ADVANTAGES OF CORPORATE
COVERNANCE IN BANKS
8]
CHALLENGES OF CORPORATE
COVERNANCE IN BANKS
9]
10]
RECOMMENDATION
11]
CONCLUSION
12]
WEBLIOGRAPHY/BIBLIOGRAPHY
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CHAPTER 1
CORPORATE GOVERNANCE: A CONCEPTUAL ANALYSIS
Corporate Governance has become one of the most commonly used phrases
in the current global business vocabulary. This raises the question, is corporate
governance is a vital component of successful business or is it simply another
fad that will fade away over time? Nations around the world are instigating far
reaching programmers for corporate governance reform, as evidenced by the
proliferation of corporate governance codes and policy documents, voluntary
and mandatory, both at the national and supranational level. We believe that the
present focus on corporate governance will be maintained into the future and
that, over time, corporate governance issues will grow in importance, rather
than fade into insignificance. The phenomenal growth of interest in corporate
governance has been accompanied by a growing body of academic research.
Modern business world demands quality, ethics and excellence, properly
injected into the organization at the level of person, process and product [PPP].
To cope with this change core competency is identified and leveraged for
success and all this is made possible through corporate governance. Corporate
Governance is an instrument for strengthening the overall effectiveness of
corporate enterprise in thecorporate world and helps to optimize the goals
of corporate entities within the boundary of corporate environment. It is an
important component in a long term perspectives of companies and has a
leading species of large genus namely, National Governance, Human
Governance, Societal Governance, Economic Governance and Political
Governance.
Corporate Governance includes the policies and procedures, which is
usually adopted by a company in achieving its objectives in relation to its
shareholders, employees, customers and suppliers, regular authorities and
community at large. Corporate Governance usually establishes a structural
framework, which makes a healthy and competitive company with self
clearing and competitiveness by some strategies, transparency, motivation and
social orientation. Corporate Governance plays an integral part to the very
existence of a company/ organization/ Banking Sector/ Corporate Entity. It
inspires and strengthens investors confidence by insuring companys
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commitment to higher grow and profits [ICSI, 2003]. The further need of
corporate governance includes: Protecting the rights of shareholders, making
confidence among the stakeholders, strengthening the Board of Directors,
providing autonomy and responsibility to the Board of Directors, providing
protection to the financial and other lending institution, and to keep
sustainability economic, environment and social. Corporate Governance is a
means of overcoming these problems, as it seeks to minimize the malpractices
by the companies by establishing the system, where more information about the
transactions of the companies or decisions taken by the management is available
to the shareholders and the public. In a corporate governance system, Board of
Director is the sole authority for merging the companies.
DEFINITIONS
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Legislation
Clear and unambiguous legislation and regulations are fundamental to
effective corporate governance. Legislation that requires continuing legal
interpretation or is difficult to interpret on a day-to-day basis can be subject to
deliberate manipulation or inadvertent misinterpretation.
Management environment
Management environment includes setting-up of clear objectives and
appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability,
implementing sound business planning, encouraging business risk assessment,
having right people and right skills for the jobs, establishing clear boundaries
for acceptable behavior, establishing performance evaluation measures and
evaluating performance and sufficiently recognizing individual and group
contribution.
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Board skills
To be able to undertake its functions efficiently and effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience.
Each of the directors should make quality contribution. A board should have the
following skills, knowledge and experience. Operational or technical expertise,
commitment to establish leadership, financial skills, legal skills and knowledge
of government and regulatory requirement.
Board appointments
To ensure that the most competent people are appointed in the board, the
board position should be filled through the process of extensive search. A welldefined and open procedure must be in place for reappointments as well as for
appointment of new directors. Appointment mechanism should satisfy all
statutory and administrative requirements. High on the priority should be an
understanding of skill requirements of the Board particularly at the time of
making a choice for appointing a new director. All new directors should be
provided with a letter of appointment setting out in detail their duties and
responsibilities.
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Board independence
Independent Board is essential for sound corporate governance. This goal
may be achieved by associating sufficient number of independent directors with
the Board. Independence of directors would ensure that there are no actual or
perceived conflicts of interest. It also ensures that the Board is effective in
supervising and, where necessary, challenging the activities of management.
The Board need to be capable of assessing the performance of managers with an
objective perspective. Accordingly, the majority of Board members should be
independent of both the management team and any commercial dealing with the
company.
Board meetings
Directors must devote sufficient time and give due attention to meet their
obligations. Attending Board meetings regularly and preparing thoroughly
before entering the board room increases the quality of interaction at board
meetings. The Board meetings are the forums for Board decision-making. These
meetings enable directors to discharge their responsibilities. The effectiveness
of Board meetings is dependent on carefully planned agendas and providing
relevant papers and materials to directors sufficiently prior to Board meetings.
Also in the present scenario, Board meeting through modern means of
communication like tele-conferencing, video conferencing may be expressly
allowed under law.
Board Resources
Board members should have sufficient resources to enable them to
discharge their duties effectively. It includes an access for director to
independent legal and professional advice at the companys expense. The cost
of supporting the Board should be transparent and reported.
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Code of conduct
It is essential that the organizations explicitly prescribe norms of ethical
practices and codes of conduct are communicated to all stakeholders and are
clearly understood and followed by each member of the organization. Systems
should be in place to periodically measure, evaluate and if possible recognize
the adherence to code of conduct.
Strategy setting
The objectives of the company must be clearly documented in a longterm corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.
Business and community obligation
Though basic activity of business entity is inherently commercial yet it
must also take care of communitys obligations. Commercial objectives and
community service obligation should be clearly documented after approval by
the Board. The stakeholders must be informed about the proposed and on-going
initiatives taken to meet the community obligations.
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Audit committees
Audit committee is an inter alia responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of internal
control and compliance with significant policies and procedures, reporting to
the Board on the key issues. The quality of audit committee significantly
contributes to the governance of the company.
Risk management
Risk is an important element of corporate functioning and governance.
There should be a clearly established process of identifying, analyzing and
treating risks, which could prevent the company from effectively achieving its
objectives. It also involves establishing a link between risk-return and
resourcing priorities. Appropriate control procedures in the form of risk
management plan must be put in place to manage risk throughout the
organization. The plan should cover activities as diverse as review of operating
performance, effective use of information technology, contracting out and
outsourcing. The Board has the ultimate responsibility for identifying major
risks to the organization, setting acceptable level of risk and ensuring that the
senior management has taken steps to detect, monitor and these risks. The
Board must satisfying itself that appropriate risk management system and
procedure are in place to identify and manage risks. For this purpose, the
company should subject itself to periodic external and internal risk reviews.
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CHAPTER 2
EVOLUTION OF CORPORATE GOVERNANCE IN
BANKING SECTOR
There is complete uniformity now in the banking industry and the system
therefore ensures responsibility and accountability on the part of the
management in proper accounting of income as well as loan impairment. At the
initiative of the regulators, banks were quickly required to address the need for
Asset Liability Management followed by risk management practices. Both these
are critical areas for an effective oversight by the Board and the senior
management which are implemented by the Indian banking system on a tight
time frame and the implementation review by RBI. These steps have enabled
banks to understand measure and anticipate the impact of the interest rate risk
and liquidity risk, which in deregulated environment is gaining importance.
Prudential norms in terms of income recognition, asset classification, and
capital adequacy have been well assimilated by the Indian banking system. In
keeping with the international best practice, starting 31st March 2004, banks
have adopted 90 days norm for classification of NPAs. In addition, norms
governing provisioning requirements in respect of doubtful assets have been
made more stringent in a phased manner. Beginning 2005, banks will be
required to set aside capital charge for market risk on their trading portfolio of
government investments, which was earlier virtually exempt from market risk
requirement. All the Indian banks barring one today are well above the
stipulated benchmark of 9 per cent and remain in a state of preparedness to
achieve the best standards of CRAR as soon as the new Basel 2 norms are made
operational. Reserve Bank of India has taken various steps furthering corporate
governance in the Indian Banking System. These can broadly be classified into
the following three categories: Transparency, Off-site surveillance and Prompt
corrective action. However, there are many gaps in the disclosures in India vis-vis the international standards, particularly in the area of risk management
strategies and risk parameters, risk concentrations, performance measures,
component of capital structure, etc. Hence, the disclosure standards need to be
further broad-based in consonance with improvements in the capability of
market players to analyze the information objectively. The off-site surveillance
mechanism is also active in monitoring the movement of assets, its impact on
capital adequacy and overall efficiency and adequacy of managerial practices in
banks. RBI also brings out the periodic data on Peer Group Comparison on
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critical ratios to maintain peer pressure for better performance and governance.
There are three major challenges facing governance ratings in India: Firstly
there does not seem to be a clear objective in relation to the capital markets. The
second challenge is that there is insufficient accumulated knowledge on
corporate governance and a great amount of fluidity in the theory at present and
the third challenge is to assign weightings to the companies in the context of
global markets. The rating agencies need to reflect on these while the regulator
refrains from putting pressure to initiate a rating system for corporate
governance.
The RBI Advisory Committee on Corporate Governance has defined
Corporate Governance as the system by which business entities are monitored,
managed and controlled. The Board of Directors occupies a pivotal place in the
scheme of Corporate Governance. The advisory group on banking supervision
has emphasized the need for enhanced transparency and disclosures in respect
of various aspects of boards constitution and functioning. Beginning with the
composition of the Board of Directors and elaborating their various functions
and duties, the corporate governance code prescribes the procedures that make
the functioning of Board more effective. These are:
1. As representatives of various stakeholders, it is the moral responsibility
of Board of Directors to ensure that the company does not undermine
moral and ethical issues in the lure of profits.
2. It is imperative for the Board to keep itself aware of the happenings in the
company rather than performing perfunctory duties.
3. Through its various committees, the board should keep its fingers on the
pulse of the activities besides inspecting the activity of the company. The
audit committee, compensation committee, nominations committee,
credit committee, risk management committee are the various sub-groups
of the board that ensure that the company sticks to the corporate
governance mechanisms.
4. The Board is accountable for the action of the company. It act as a
governing body that controls and channelizes the resources into
productive and morally right ways. It is the responsibility of the Board to
ensure that proper governance practices are in place in the company. It
has to keep track of the going on in the company through active
involvement at the strategic and policy-making levels.
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CHAPTER 3
NEED OF CORPORATE GOVERNANCE IN BANKS
Banks and development financial institutions of India, particularly DFIs
have important role in governance of companies and where they have their
nominee directors. The role of these nominee directors is to protect the interest
of the institution and also as a member of the board be responsible as any other
director. However, in certain instances where irregularities have been detected,
the role of nominee directors has attracted attention. however, it is felt in
general that theses nominee directors have a duty to act in the larger public
interest. Banking is clearly a very special sub-set of corporate governance with
much of its management obligations enshrined in law or regulatory codes.
Governance is also a curiously two-side issue for banks since their funding and,
often, ownership of other companies makes them a significant stakeholder in
their own right. Governance in bank is a considerably more complex issue than
in
i]
ii]
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iii]
iv]
v]
vi]
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CHAPTER 4
SCOPE OF CORPORATE GOVERNANCE IN BANKS
I]
II]
Banks have:
with, among other factors the manner in which the business andattendees of
individual institutions are governed by their boarding of directory and senior
management which affects how banks:
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CHAPTER 5
MEASURES TAKEN BY RBI FOR IMPLEMENTATION OF
CORPORATE GOVERNANCE NORMS IN BANKS
Series of efforts being made by two independent regulatory bodies in a
last few years to accomplish harmonism of regulations policies and guidelines
made applicable to the regulated entities. RBI has advised, on the suggestion
from the SEBI that the Indian commercial banks (both public & private sector).
Which are listed on the stock exchanges should adopt the guidelines of SEBI
committees on corporate governance. They are as follows:
A]
board.
B]
D]
Remuneration of directors,
E]
F]
G]
H]
I]
reviewing with the management by the audit committee of the board the
The audit committee of the board may look into the reasons for default in
A] In the interest of the stakeholders, the private sector and public sector banks
which have issued shares to the public may form committees on the same lines
as listed companies under the chairmanship of non- executive director to look
into redressal of shareholders complaints.
B] All listed banks may provide in audited financial results on half yearly banks
to their shareholders with summary of significant development.
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CHAPTER 6
PROTECTION OF INTEREST OF INVESTORS AND
CUSTOMERS
In todays competitive business world the businessmen have to deal with
several stake holders, one of them is customers. Corporate needs to think
carefully about their approach to customer service and make sure about its
awareness about customers legal rights. Proper respect towards customers
rights helps the corporate to build a good reputation and can retain their custom.
1]
following rights:
The goods must match the description which company or business gives
to them for example, if you say a computer has an 80 GB hard drive it
cant be 40 GB.
The goods must be of satisfactory quality- It means they must be of a
standard that any reasonable person would regard as satisfactory. They
should be safe, work properly, and have no defects in their appearance or
finish.
The goods must be fit for the purpose specified. It says that, they should
be capable of doing what they are meant for. For example, a watch
should tell the time and if the customer said they wanted to use it while
swimming and you didnt say it was unsuitable, it should be able to
perform this task.
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2]
as described fit for their purpose, or of satisfactory quality, they can reject them.
Except where they are hiring or purchasing in the course of business and the
fault is so slight it would be unreasonable to do so.
3]
4]
Price:
1. Bid rigging
2. Dumping
3. Predatory pricing
4. Price discrimination
5. Price fixing
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B]
Product:
1. Inferior quality
2. Adulteration
3. Faulty weight
4. Defective
C]
Place:
1. Lengthy supply chain
2. Share of commission of every distribution agent in price of the
commodity
3. Hoarding
D]
Promotion:
1. Misleading advertisement
2. Fake offers
3. Wrong information by salesperson
Under the consumer protection act 1986, a consumer or customer is
guaranteed following rights:
a) Rights to be protected against the marketing of goods and services which
are hazardous to life and property.
b) Right to be informed about the quality, quantity, potency, purity, standard
and price of goods and services.
c) Right to be assured.
d) Right to be heard.
e) Right to seek redressal against unfair trade practices.
f) Right to consumer protection.
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3. Retention of staff
Motivation increases when employees/staff are part of a business that has
a well-defined and communicated vision and direction. This can improve
staff retention which can become especially important when it comes to
attracting and retaining senior talent.
4. Improved relationships with the bank
Corporate Governance enables robust and regular financial and
management reporting. The resulting systematic approach to producing
data will foster confidence in your business from your funders/banks as
well as your investors. Improved access to capital can be another flow-on
benefit from sound Corporate Governance.
5. Improvement in profitability
Governance often leads to improved reporting on performance. This
means managers and owners are better equipped to make higher quality
decisions that can drive an increase in sales and margins and a reduction
in costs
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CHAPTER 8
CHALLENGES OF CORPORATE GOVERNANCE IN BANKS
There are several reasons for the absence of sufficient corporate governance
mechanism in the Indian banking sector:
1. Multiplicity of regulations:
Banks are governed by multiple enactments. For instance, private banks
are governed both by the companies Act, 1956 and the banking
companies regulation Act and Bank nationalization Act, 1969 [amended
in 1982]. The state Bank of India and its associates are governed by the
state Bank of India Act, 1955 [amended in 1997]. The Regional Rural
Banks are regulated by RRB Act, 1975, the co-operative banks by
cooperative banking regulation Act, 1949 and Banking Laws [cooperative
societies] Act, 1965. The RBI advisory group has opined that all the
banks should be brought within the purview of a single act which
prescribes the various practices to be followed by one and all.
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3. Qualitative V. Quantitative:
Banking norms are quantitative the Qualitative. Governance depends
more on quality of adherence to the norms in addition to quantitative
yardsticks.
5. Mismatch
between
ownership
pattern
and
board
level
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7. Board accountability:
Accountability of directors in public sector banks is another aspect on
which processes have to be put in the place. Directors must be made
aware as to what they are expected to do on the board. Their actual
performance should be monitored and kept in view while reappointing
them.
9. Political boards:
Very often, board level appointments in financial institutions are based on
political considerations. Board appointments must remain stable and
unaffected by political developments. In many cases, whole of the board
has got replaced overnight.
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CHAPTER 9
Corporate Governance in Indian Bank Case Study: State Bank of
India
1. INTRODUCTION
The issue of corporate governance has come up mainly in the wake up of
economic reforms characterized by liberalization and deregulation. According
to OECD, the corporate governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation, such as, the
board, managers, shareholders and other stakeholders and it also spells out the
rules and procedures for making decisions on corporate affairs. Corporate
governance is exclusively of board of directors in a manner that it becomes a
way of organizational life and not merely written rules or regulations or code of
ethics. Ethics and transparency are cardinals of corporate governance.
2. WORLD SCENARIO
The seeds of modern corporate governance were probably sown by the
Watergate scandal in the USA. Subsequent investigations by US regulatory and
legislative bodies highlighted control failures that had allowed several major
corporations to make illegal political contributions and bribe government
officials. While these developments in the US stimulated debate in the UK, a
spate of scandals and collapses in that country in the late 1980s and early 1990s
led shareholders and banks to worry about their investments. Several companies
in UK which saw explosive growth in earnings in the 1980s ended the decade in
a memorably disastrous manner. In May 1991, the London Stock Exchange set
up a committee under the chairmanship of Sir Arian Cadbury to help raise the
standards of corporate governance and the level of confidence in financial
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reporting and auditing by setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is expected of them. The
committee investigated accountability of the board of directors to shareholders
and to the society. It submitted its report and the associated code of best
practices in December 1992 wherein it spelt out the methods of governance
needed to achieve a balance between the essential powers of the board of
directors and their proper accountability. Contemporary corporate governance
started in 1992 with the Cadbury report in the UK. Cadbury was the result of
several high profile company collapses and was concerned primarily with
protecting weak and widely dispersed shareholders against self-interested
directors and managers.
3. INDIAN SCENARIO
The corporate governance initiative in India was not triggered by any
serious nationwide financial, banking and economic collapse. The initiative in
India was driven by The Confederation of Indian Industry. In December 1995,
CII set up a task force to design a voluntary code of corporate governance. The
final draft of this code was widely circulated in 1997. In April 1998, the code
was released. It was called Desirable Corporate Governance: A Code.
Following CIIs initiative, the Securities and Exchange Board of India (SEBI)
set up a committee under Kumar Mangalam Birla to design a mandatory-cumrecommendatory code for listed companies. The Birla Committee Report
submitted in February 2000 and it was approved by SEBI in December 2000.
The report became mandatory for listed companies through the listing
agreement and implemented according to a rollout plan. Following CII and
SEBI, the Department of Company Affairs (DCA) modified the companies Act
1956, to incorporate specific corporate governance provisions regarding
independent directors and audit committees.
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economy of the country and any failure in a bank might have a direct bearing
on the financial health of the country. The Basel committee on banking
supervisory authorities was established by the Central Bank Governors of the
G10 developed countries in 1975. The Basel committee in the year 1999 had
brought out certain important principles on corporate governance for
banking organizations which, more or less have been adopted in India. The
minimum impact of recession on Indian economy was because of strong and
effective nature of banking sector in India.
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7. BOARD PRACTICES
Central Board
the SBI Act 1955. The banks central board draws its powers from and carries
out its functions in compliance with the provisions of State Bank of India Act &
Regulations 1955. Its major roles include, among others, overseeing the risk
profile of the bank; monitoring the integrity of its business and control
mechanisms; ensuring expert management, and maximizing the interests of its
stakeholders. The central board has constituted seven board level committees.
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8.2.1 ATMs: State Bank group has in its stable, variants of ATMs. The number
of ATMs of the SBI group was 25,005 in March 2011 and they increased to
27,286 in March 2012. The number of ATMs of SBI was 20,084 in 2011 and
they are 22,141 in 2012. The total debit cards issued by SBI were 728 lakhs in
2011 and they increased to 910 lakhs in 2012.
8.2.2 Mobile Banking: There were 10.13 lakh registered mobile customers in
2011 and they increased to 36.45 lakhs in 2012. The customers were using the
service with more than 1.20 lakhs daily transactions, around 46% of which are
financial transactions amounting to Rs. 2.45 crores. SBI has launched mobile
technology based prepaid payment services under the brand name of State Bank
Mobi Cash.
8.2.3 Internet Banking: Internet banking service is available through
www.onlinesbi.co.in for both retail and corporate customers of the bank. The
number of customers in March 2011 was 62.57
8.2.3 Lakhs in March 2012. The number of transactions during 2010-2011 was
1437.46 lakhs and in 2011-12 it increased to 2610.32 lakhs.
8.2.4 Foreign Offices: The SBI is operating 173 branches in 34 countries,
including 2 OBUs in India to run their operations on a common banking
applications software, with their databases connected to a central data centre
backed up by a synchronized disaster recovery site. All foreign offices use
internet banking channel and 130 ATMs at various locations abroad cater to the
banks overseas customers with most of the ATMs connected to the centralized
ATM switch in India.
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2.Geographic Segments
Segment
or
Segments
Treasury
Corporate
Retail
/Whole
Banking
Domestic
Foreign
Total
sale
Banking
Revenue
23,874
42,773
54,091
1,14,080
6,659
1,20,739
(21,665)
(32,935)
(42,062)
(91,086)
(5,576)
(96,662)
Segment
3,35,016
3,94,421
5,95,182
11,55,176
1,80,342
13,24,621
Assets
Segment
1,96,222
Liabilities
3,81,202
6,28,479
10,71,225
1,80,342
12,05,903
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crores in 2011-12. Basic earnings per share in 2010-11 are Rs. 130.16 and it
increases to Rs. 184.31 in 2011-12.
9.4 Details of Different Provisions and Contingencies
The provisions and contingencies of SBI during 2011- 12 are explained in
table 2. The total provisions are Rs. 17,071.05 crores in 2010-11 and they
increased to Rs. 19,866.25 crores during 2011-12.
Table: 2 Provisions and Contingencies
(Rs. in crores)
Provisions
2011-2012
2010-2011
Current Tax
6,335.37
5,709.54
Deferred Tax
455.93
976.82
Depreciation
on 683.28
646.75
Investments
Non-Performing Assets 11,494.10
8,415.44
Restructured Assets
51.76
376.65
Standard Assets
978.81
976.60
19,866.25
17,071.05
Total
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2011-2012
2010-2011
Concentration of
83,199.80
65,236.21
2,13,774.62
2,07,277.40
2,931.51
730.27
Advances (Twenty
Largest Borrowers)
Concentration of
Exposures (Twenty
Largest Borrowers )
Concentration of NPAs
(Four NPA Accounts)
banking are increasing every year, they are using e-banking for normal or
minimum services. It is suggested that consumer service committee must take
initiative steps to increase online banking services through customer awareness
programs and internet banking training programs. It decreases customers
pressure on branches and it is useful to reduce customers waiting time in all
branches. The study found that customers complains are increased during the
year 2011-12 (4, 62,381) when compared to the previous year 2010-2011
(30,904). Consumer service committee must take initiative steps to satisfactorily
address customers complaints.
The study found that, concentration of advances to twenty largest borrowers
increased from Rs. 65,236 crores in 2010-2011 to Rs. 83,199 crores in 20112012 indicating credit risk. It is suggested that the credit risk management
should take necessary steps to minimize risks.
The study found that concentration of exposures to twenty largest borrowers
has increased from Rs. 2, 07,277.40crores in 2010-11 to Rs. 2, 13,774.62 crores
in 2011-12 indicating credit risk. It is suggested that the central board should
take immediate action to reduce the concentration of exposures. It is found that
the concentration of NPAs total exposure to top four NPA accounts was Rs.
730.27 crores in 2010-11 and it is increased to Rs. 2,931.51 crores in 2011-21
indicating credit risk. It is suggested that the credit risk management should take
necessary steps to avoid this type of concentration of NPAs.
The SBI is
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Recommendations
The important features of the financial sector which have a bearing
on the corporate governance structure include:
1. Dominance of the public sector ownership in the financial sector whether
by bank or the development financial institutions.
2. Shift away from external micro-regulation by the RBI to the internal
regulation.
With the advent of economic liberalization, the ownership pattern in
many public sector financial intermediaries is undergoing a change. The
governments are gradually reducing its stake in these institutions. It has made
many of this institution to approach the market for funding support. Before
mobilizing the public investments, they must convince prospective investors
that they are worth investing.
Many areas which require corporate governance practices in the banking
sector can be found in narasimham committee reports (committee on financial
system and committee on banking sector reform). Following suggestions
therefore may be kept in view for reforming the corporate governance system in
the Indian banking sector:
1. The board of directors, two third should be non-executive directors
and majority of them should be independent of the institutions as well
as government.
2. Of the directors, two third should be non-executive directors and
majority of them should be independent of the institutions as well as
government.
3. Non-executive directors should be appointed for an initial term of
three years and reappointed for a maximum of three additional years.
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4. The role of chairman and chief executive should be separated and the
chairman should ideally be a non-executive director. The appointment
of chief-executive and other whole-time directors should be made by
the board with the help of a nomination committee comprising of
majority of non-executive directors. The nomination committee could
have a nominee of the government or any institutional shareholder
having a stake of more than 26 per cent.
5. The credit/investment committee of board should have a fair number
of independent directors.
6. Audit committee comprising of independent non-executive directors
should be made compulsory.
7. The compensation committee of the board consisting of non-executive
directors And headed by a chairman should be the final authority to
decide the compensation payable to the staff.
8. The financial institution should be brought under the regulatory and
supervisory ambit of the reserve bank.
9. The management should be accountable only to general body of
shareholders.
10.The regulatory practices should be aligned with international practices
after making suitable modifications.
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CONCLUSION
In the present corporate world, corporate governance has takes significant
role due to globalization and liberalization. The issue of corporate governance
in banking sector is more complex significance because of certain factors. It is
opined that the success of corporate governance in Indian banking sector depend
upon well-constructed financial sector reform in line with corporate
reconstructing. A piece-meal approach to such a vital sector of the economy
would be of serious consequences. What is urgently required is to observe and
well document of corporate governance rules and regulations. It helps the
banking sector by an effective means of investors protection, fund raising
ability, maximize shareholders value and finally, integrating Indian banking
system with the world economy.
Corporate governance initiatives for banks become imperative for the
following issues:
Banking sector has strong linkage with real sector of the economy and
they are a major source of funding and payment to all types of
economic activities.
Banking sector has mixed ownership in the form of nationalized
banks, private sector banks, foreign banks and other financial
institutions. The recent entry in capital markets and followed changes
in the ownership of banks necessitate changes in the reporting and
governance standards.
RBI would continue the central monitory regulator in the economy
through more independence and would be given in the Prime Lending
Rate (PLR), operational areas and diversification opportunities
available to the individual banks. This helps to enhance the
profitability of the banks.
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