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CLASS: M.Com (Accountancy)




S.V. Road, Malad (W),
Mumbai- 400 064
YEAR: 2015 -16



CLASS: M.Com (Accountancy)




S.V. Road, Malad (W),
Mumbai- 400 064
YEAR: 2015 -16


I Mr. Yash D. Biyani Roll No. 8 of Prahladrai Dalmia

Lions College of Commerce and Economics, Malad (W) of
M.Com Accountancy (Semester II) has completed project
INDIA in the academic year 2015-16. This information
submitted is true and original to the best of my


Signature of


S.V. Road, Malad (W),
Mumbai- 400 064

I Ms. SUBHASHINI NAIKAR hereby certify that Mr.
YASH BIYANI. A student of Prahladrai Dalmia Lions
College of M.Com Accountancy (Semester II) Roll no.8 has





STATE BANK OF INDIA in the Academic Year 2015-16.

This information submitted is true and Original to the best
of my Knowledge.

External Examiner:

Project Co-ordinator:
College Seal

I would like to thank the University of Mumbai
and my college for giving me this opportunity for taking
such a challenging project, which has enhanced my
I express my sincere gratitude to the







and our librarian and other

teachers for their constant support and helping for

completing the project.
I am also grateful to my friends for giving
support in my project. Lastly, I would like to thank each
and every person who helped me in completing the
project especially my parents.


The primary aim of this project was to enhance and enrich my

knowledge about the corporate governance in banking sector. This project
involves a critical evaluation of the corporate governance in State Bank of India.
The objective of the project is to evaluate the corporate governance practice in
banking sector through a case study of the State Bank of India. For evaluation
purpose, this project divided into different parts. Based on different elements of
and with the help of secondary data, this work has analyzed and evaluated the
practice of corporate governance in State Bank of India. In the first part, the
concepts of corporate governance like evolution of corporate governance in
world and Indian scenario, role and importance of corporate governance in
banking sector has been discussed. The second part analyses the practice of
corporate governance as determined in State Bank of India with the help of
elements like board practices, stakeholders and transparent disclosure of
information. The Indian banking system is among the healthier performers in the
world. In the liberalized economic environment and integration of the country at
present the banking sector in India cannot ignore the importance of corporate
governance. The corporate governance philosophy of banks is the pursuit of
sound business ethics and strong professionalism that aligns the interests of all
stakeholders and the society. The State Bank of India is the largest bank amongst

all public and private sector banks in India. It is the second largest bank in the
world measured by the number of branch offices. The bank provides various
domestic, international and NRI products and services through its vast network
in India and overseas.






Corporate Governance: History.



Corporate Governance: Introduction.



Corporate Governance in banks in India.



Corporate Governance in State bank of India.



Suggestions and Recommendations.









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 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.

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-cum-recommendatory 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.











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.
Definition of 'Corporate Governance': The system of rules, practices and processes by which a
company is directed and controlled. Corporate governance essentially involves balancing the
interests of the many stakeholders in a company - these include its shareholders, management,
customers, suppliers, financiers, government and the community. Since corporate governance
also provides the framework for attaining a company's objectives, it encompasses practically
every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.
The framework of rules and practices by which a board of directors ensures accountability,
fairness, and transparency in a company's relationship with its all stakeholders
(financiers, customers, management, employees, government, and the community).

Other definition:
Corporate governance has also been more narrowly defined as "a system of law and sound
approaches by which corporations are directed and controlled focusing on the internal and
external corporate structures with the intention of monitoring the actions of management and
directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate
One source defines corporate governance as "the set of conditions that shapes the ex
post bargaining over the quasi-rents generated by a firm." The firm itself is modelled as a
governance structure acting through the mechanisms of contract. Here corporate governance
may include its relation to corporate finance.

The corporate governance framework consists of:

(1) explicit and implicit contracts between the company and the stakeholders
for distribution of responsibilities, rights, and rewards,
(2) procedures for reconciling the sometimes conflicting interests of stakeholders in
accordance with their duties, privileges, and roles, and
(3) procedures for proper supervision, control, and information-flows to serve as
a system of checks-and-balances.

Corporate governance refers to the set of systems, principles and processes by which a
company is governed. They provide the guidelines as to how the company can be directed or
controlled such that it can fulfill its goals and objectives in a manner that adds to the value of
the company and is also beneficial for all stakeholders in the long term. Stakeholders in this
case would include everyone ranging from the board of directors, management, shareholders
to customers, employees and society. The management of the company hence assumes the role
of a trustee for all the others.
Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. Governance structures and principles identify the
distribution of rights and responsibilities among different participants in the corporation (such
as the board of directors, managers, shareholders, creditors, auditors, regulators, and
other stakeholders) and includes the rules and procedures for making decisions in corporate
affairs. Corporate governance includes the processes through which corporations' objectives
are set and pursued in the context of the social, regulatory and market environment.
Governance mechanisms include monitoring the actions, policies, practices, and decisions of
corporations, their agents, and affected stakeholders.
Corporate governance practices are affected by attempts to align the interests of
stakeholders. Interest in the corporate governance practices of modern corporations,
particularly in relation to accountability, increased following the high-profile collapses of a
number of large corporations during 20012002, most of which involved accounting fraud;
and then again after the recent financial crisis in 2008. Corporate scandals of various forms
have maintained public and political interest in the regulation of corporate governance. In the
U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise is associated
with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore
public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel)
are associated with the eventual passage of the CLERP9 reforms. Similar corporate failures in
other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

What are the principles underlying corporate governance?

Corporate governance is based on principles such as conducting the business with all integrity
and fairness, being transparent with regard to all transactions, making all the necessary
disclosures and decisions, complying with all the laws of the land, accountability and

responsibility towards the stakeholders and commitment to conducting business in an ethical

manner. Another point which is highlighted in the SEBI report on corporate governance is the
need for those in control to be able to distinguish between what are personal and corporate
funds while managing a company.

Why is it important?
Fundamentally, there is a level of confidence that is associated with a company that is known
to have good corporate governance. The presence of an active group of independent directors
on the board contributes a great deal towards ensuring confidence in the market. Corporate
governance is known to be one of the criteria that foreign institutional investors are
increasingly depending on when deciding on which companies to invest in. It is also known to
have a positive influence on the share price of the company. Having a clean image on the
corporate governance front could also make it easier for companies to source capital at more
reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion
only after the exposure of a large scam.

Why was it in the news recently?

Corporate governance has most recently been debated after the corporate fraud by Satyam
founder and chairman Ramalinga Raju. In fact, trouble started brewing at Satyam around
December 16 when Satyam announced its decision to buy stakes in Maytas Properties and
Infrastructure for $1.3 billion. The deal was soon called off owing to major discontentment on
the part of shareholders and plummeting share-price. However, in what has been seen as one
of the largest corporate frauds in India, Raju confessed that the profits in the Satyam books
had been inflated and that the cash reserve with the company was minimal. Ironically, Satyam
had received the Golden Peacock Global Award for Excellence in Corporate Governance in
September 2008 but was stripped of it soon after Raju's confession.



Before understanding the concept of Corporate Governance (CG) in India, more particularly
in banks, it is essential to get insight into Administration and Governance as distinct from CG.
Broadly speaking, administration is an off shoot of governance and governance is the subset
of CG but the terms are not that simple as it looks. They have far reaching implications when
their implementation in the bank comes into picture. Banks are large institutions with a range
of delivery models with interplay of products and services. Most important is the human
resource element where standardization is difficult to enforce. Software and hardware may
function in a similar fashion within the given framework and set of instructions but human
resources have mind to different call in a similar set of situations. It is very difficult to
comprehend human mind and bring about standardization in their actions. But there are set
rules and conditions laid down in banks that bind the behavior of the employees. Its

enforcement needs constant monitoring and checks and balances to ensure that they conform
to the rule book. Here comes the role of Administration.

It is the act or process of administering, especially running the management of a government
or large institution or a bank by enforcing the codified rules and conditions. It is the activity of
a government or state or a bank in the exercise of its powers and duties. Often the
Administration also means the management of any office, business, or organization; direction
or the duty or duties of an administrator in exercising the executive functions of the position.
Administrators, broadly speaking, engage in a common set of functions to meet the
organization's goals. These "functions" of the administrator were described by Henri Fayol as
"the 5 elements of administration".

Planning - is deciding in advance what to do, how to do it, when to do it, and who should
do it. It maps the path from where the organization is to where it wants to be. The planning
function involves establishing goals and arranging them in a logical order. Administrators
engage in both short-range and long-range planning.

Organizing - involves identifying responsibilities to be performed, grouping

responsibilities into departments or divisions, and specifying organizational relationships. The
purpose is to achieve coordinated effort among all the elements in the organization
(Coordinating). Organizing must take into account delegation of authority and responsibility
and span of control within supervisory units.

Staffing - means filling job positions with the right people at the right time. It involves
determining staffing needs, writing job descriptions, recruiting and screening people to fill the

Directing (Commanding) - is leading people in a manner that achieves the goals of the
organization. This involves proper allocation of resources and providing an effective support
system. Directing requires exceptional interpersonal skills and the ability to motivate people.
One of the crucial issues in directing is to find the correct balance between emphasis on staff
needs and emphasis on economic production.


Controlling - is a function that evaluates quality in all areas and detects potential or actual
deviations from the organization's plan. This ensures high-quality performance and
satisfactory results while maintaining an orderly and problem-free environment. Controlling
includes information management, measurement of performance, and institution of corrective

Budgeting - exempted from the list above, incorporates most of the administrative
functions, beginning with the implementation of a budget plan through the application of
budget controls...

Governance, in general terms, means the process of decision making and the process by which
decisions are implemented (or not implemented), involving multiple actors. Good governance
is one which is accountable, transparent, responsive, equitable and inclusive, effective and
efficient, participatory and which is consensus oriented and which follows the rule of law

Corporate Governance:
With the faster pace of corporatization, the volumes of market capitalization have globally
increased at exponential pace. More and more investors across the globe explore equity
markets for investments and profit earning opportunities. Innovative methods of accessing
funds and efforts of leveraging capital have accentuated the sensitivity of risk. The corporates
are susceptible to the pitfalls of over leveraging their capital resources resulting in imbalanced
exposure, sometimes even to the unknown downside risks. Thus the influx of funds into the
stock market from various sources has heightened the onus of regulators to protect investor
interest thereby making the task much more challenging. Ensuring that the end use of investor
funds are prudent and are in conformity with the global best practices is a tough task posing a
sustained pressure on regulators to innovate better ways and means.
In this context, corporate governance has come to occupy a prominent position in modulating
the conduct of the companies who raise funds through equity market. Public listed companies,
financial institutions, banks and other corporate accessing funds from public have to be made


to follow rigid discipline in its governance, more so in the application of funds to protect the
long term interests of the organizations.
Coming to the specific aspects of bank dominated Indian financial system; effective financial
intermediation is the life line of sustainable development of the economy. Though we have
multiple segments of banks such as Public Sector Banks (PSBs), New Private Sector Banks
(NPSBs), Old Private Sector Banks (OPSBs), Cooperative Banks, Regional Rural Banks
(RRBs) and Foreign Banks, about 70 per cent of the banking business is held by PSBs
comprising of SBI, its subsidiaries and the nationalized banks.
Banks access capital market to shore up their capital adequacy needs in terms of the norms set
by the Bank for International Settlement (BIS).The banking intermediaries engaged in
mobilizing deposits and lending them to the needy sector for sustained growth of agriculture,
industry and commerce have a critical role to play in the economy. Therefore the functions of
banks are sensitive calling for utmost prudence in governance. This backdrop firms up the
significance of corporate governance in banks for sustained growth of financial system.

Global Genesis of concept of Corporate Governance:

The seeds of modern Corporate Governance were probably sown by the Watergate scandal in
the United States. As a result of subsequent investigations, US regulatory and legislative
bodies were able to highlight control failures that had allowed several major corporations to
make illegal political contributions. This led to the development of the Foreign and Corrupt
Practices Act of 1977 in USA that contained specific provisions regarding the establishment,
maintenance and review of systems of internal control.
This was followed in 1979 by the Securities and Exchange Commission of USAs proposals
for mandatory reporting on internal financial controls. In 1985, following a series of high
profile business failures in the USA, the most notable one of which being the Savings and
Loan collapse, the Treadway Commission was formed. Its primary role was to identify the
main causes of misrepresentation in financial reports and to recommend ways of reducing
incidence thereof. The Treadway report published in 1987 highlighted the need for a proper
control environment, independent audit committees and an objective Internal Audit function.
It called for published reports on the effectiveness of internal control. It also requested the
sponsoring organizations to develop an integrated set of internal control criteria to enable
companies to improve their systemic measures.

Accordingly COSO (Committee of Sponsoring Organizations) was born. The report produced
by it in 1992 stipulated a control framework which has been endorsed and refined in the four
subsequent UK reports: Cadbury, Rutteman, Hampel and Turnbull. While developments in the
United States stimulated debate in the UK, a spate of scandals and collapses in that country in
the late 1980s and early 1990's led shareholders and banks to worry about their investments.
These also led the Government in UK to recognize that the then existing legislation and selfregulation were not working.
Companies such as Polly Peck, British & Commonwealth, BCCI, and Robert Maxwells
Mirror Group News International in UK were all victims of the boom-to-bust decade of the
1980s. Several companies, which saw explosive growth in earnings, ended the decade in a
memorably disastrous manner. Such spectacular corporate failures arose primarily out of
poorly managed business practices.
It was in an attempt to prevent the recurrence of such business failures that the Cadbury
Committee, under the chairmanship of Sir Adrian Cadbury, was set up by the London Stock
Exchange in May 1991. The committee, consisting of representatives drawn from the top
levels of British industry, was given the task of drafting a code of practices to assist
corporations in U.K. in defining and applying internal controls to limit their exposure to
financial loss, from whatever cause.

Crystallization of concept of Corporate Governance:

With this background of genesis of Corporate Governance practices across the globe, it may
be pertinent to recall the earliest definition of Corporate Governance by the Economist and
Noble laureate Milton Friedman. According to him, Corporate Governance is to conduct the
business in accordance with owner or shareholders desires, which generally will be to make
as much money as possible, while conforming to the basic rules of the society embodied in
law and local customs.
Some more established definitions state that Corporate governance involves a set of
relationships between a companys management, its board, its shareholders and other
stakeholders and also the structure through which objectives of the company are set, and the
means of attaining those objectives and monitoring performance are determined


According to Shri Kumar Mangalam Birla fundamental objective of corporate governance

is the enhancement of the long-term shareholder value while at the same time protecting the
interests of other stakeholders.
The spirit of these definitions clearly bring to fore the significant role of Corporate
Governance. If the Corporate Governance is implemented in totality in banks, it will have
impact on the overall health of the banking system reflected in the form of rise in business
levels, profitability ratios, dividends paid, market capitalization, earnings per share, net worth,
and book value of the shares and so on. The expression of interest of foreign banks to expand
operations in India, their strategic move to join collaborations, joint ventures, tie ups,
correspondent relations etc with the Indian financial entities are also a reflection of soundness
of stable governance policies.
Adoption of Corporate Governance practices in banks has begun to reflect changes in the style
of governance and their growth pattern. Before we embark on further study of its role in
banking system, a quick look at the pace of growth of banking sector will help us crystallize
our views. The following sections will provide a snap shot of how the banks have broadly
done in the recent years. These sections will also attempt quantification of performance of
banks in the capital market which has a better correlation with the policy of corporate
governance measures.
More emphasis is laid globally on evolving best practices in corporate governance. Good
governance is the sine-quo-non of running organisations to enhance their prospects of growth.
The standard of governance of companies has also come to be known as the pulse of
advancement of civilization. A set of well run companies in a country can contribute to the
enhancement of stake holder value that goes to enrich the society. Hence it is essential that
the principles of corporate governance and its regulatory system needs to be reinforced to
keep up a productive corporate culture. There have been glaring instances of failure of key
companies across the globe, more particularly in the last few years exposing the vulnerability
of corporate sector to failures in governance. Such failure of companies has multiple
ramifications. Beginning with the identity of the company, all the stake holders and even the
society at large are forced to experience irreparable loss.
Corporate Governance as a school of thought is globally practiced as an ethical, board driven
policy prescription that can put companies on a sustained growth trajectory having potentiality
to contribute substantially to the society. Presence of a large number of such successful

companies builds up a productive environment forging a constructive alliance with the

economic development of the country. Hence establishment of a high standard of corporate
governance is necessary for consistency in economic development. But many times certain
companies are unable to effectively disseminate the principles of corporate governance to the
top management stream leading to their failure. Such failed institutions are detrimental to the
stakeholders and welfare of the society.
Globalised economies seeking to maximise stakeholder values many times build up a
tendency to fall prey to look for short term gains leading to breakdown of systemic controls
and many times resulting in the closure of the units. The demise of the corporate begins with
the break down in adhering to the ethical values, sacrificing good governance and succumbing
of the management to the temptation to make large non existing profits for earning lump sum
bonus and higher remunerations. In the sustainable interest of the organisation, effectiveness
of checks and balances in protecting the value system of the organisation assumes more

Growth of banking system in India:

Banking system is the strategic building block of the economy. The challenge and complexity
of implementing corporate governance can be well understood only if we can appreciate the
size of the banking system. We need to appreciate that the Indian banking system has made
commendable progress in extending its geographical spread and functional reach. The spread
of the banking system has been a major factor in promoting financial intermediation in the
economy. The divergent growth of the banking system has also been responsible for boosting
domestic savings and in expanding credit reach. Banks are basically engaged in mobilizing
resources for the purpose of lending to foster growth and development. The magnitude of
growth of banking system can be indicated as follows:
Expansion of Banking Since
Nationalization Year




1. No. of Commercial Banks (incl.





2.No. of Bank Offices





2(a) Out of 2, no.of Rural and semiurban bank offices





RRBs and LABs)


3.Population per office





4.Per capita Deposit of Scheduled

Rs. 88


Rs. 23,382


Rs. 68


Rs. 1,7541


Commercial Banks (SCBs)

5.Per capita Credit of SCBs

Source: Reserve Bank of India

Since nationalization of 14 major commercial banks in 1969, followed by nationalization of
another 6 banks in 1980, Indian banking system has expanded rapidly.
The number of banks now stands at 173 up from 73 in 1969. RBI is also now set to license
more of private sector banks shortly opening up scope for further enlargement of the size of
banking system.
The number of bank offices increased from about 8,000 in 1969 to over 100,000 by 2012.
The average population per branch office has sharply declined from 64,000 in 1969 to 13,000
Both per capita deposit and per capita credit have expanded about 600 times. Even accounting
for inflation, this is significant expansion.
The total deposits of Scheduled Commercial Banks have reached Rs. 71 Trillion while the
advances have touched Rs.54 Trillion. The Credit Deposit Ratio works out to 76.37 in June
2013. Administering such huge banking system with large branch network of over 1, 00,000
needs well calibrated governance, checks and balances at all levels so that implementation of
corporate governance is made possible.

Broad Canvass of Corporate Governance guidelines for Banks:

Effective corporate governance practices are essential to achieving and maintaining public
trust and confidence in the banking system, which are critical to the proper functioning of the
banking sector and economy as a whole. Poor corporate governance may contribute to bank
failures, which can pose significant public costs and consequences due to their potential
impact on any applicable deposit insurance systems and the possibility of broader
macroeconomic implications, such as contagion risk and impact on payment systems. In
addition, poor corporate governance can lead markets to lose confidence in the ability of a

bank to properly manage its assets and liabilities, including deposits, which could in turn
trigger a bank run or liquidity crisis. Indeed, in addition to their responsibilities to
shareholders, banks also have a responsibility to their depositors.
The OECD principles define corporate governance as involving a set of relationships
between a companys management, its board, its shareholders, and other stakeholders.
Corporate governance also provides the structure through which the objectives of the
company are set, and the means of attaining those objectives and monitoring performance are
determined. Good corporate governance should provide proper incentives for the board and
management to pursue objectives that are in the interests of the company and its shareholders
and should facilitate effective monitoring. The presence of an effective corporate governance
system, within an individual company and across an economy as a whole, helps to provide a
degree of confidence that is necessary for the proper functioning of a market economy.
From a banking industry perspective, corporate governance involves the manner in which the
business and affairs of banks are governed by their boards of directors and senior
management, which affects how they function:
Set corporate objectives;
Operate the banks business on a day-to-day basis;
Meet the obligation of accountability to their shareholders and take into account the interests
of other recognized stakeholders;
Align corporate activities and behavior with the expectation that banks will operate in a safe
and sound manner, and in compliance with applicable laws and regulations; and
Protect the interests of depositors.
Supervisors have a keen interest in sound corporate governance as it is an essential element in
the safe and sound functioning of a bank and may affect the banks risk profile if not
implemented effectively. As the functions of the board of directors and senior management
with regard to setting policies, implementing policies and monitoring compliance are key
elements in the control functions of a bank, effective oversight of the business and affairs of a
bank by its board and senior management contributes to the maintenance of an efficient and
cost-effective supervisory system. Sound corporate governance also contributes to the
protection of depositors of the bank and permits the supervisor to place more reliance on the

banks internal processes. In this regard, supervisory experience underscores the importance of
having the appropriate levels of accountability and checks and balances within each bank.
Moreover, sound corporate governance practices are especially important in situations where a
bank is experiencing problems, or where significant corrective action is necessary, as the
supervisor may require the board of directors substantial involvement in seeking solutions
and overseeing the implementation of corrective actions.
A banking corporation is a congregation of various stakeholders, namely, customers,
employees, investors, vendor partners, government and society. A bank should be fair and
transparent to its customers and stakeholders in all its transactions. This has become
imperative in todays globalized business world where corporations need to access global
pools of capital, need to attract and retain the best human capital from various parts of the
world, need to partner with vendors on mega collaborations and need to live in harmony with
the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be
able to succeed.
Corporate Governance is all about ethical conduct of business. Ethics is concerned with the
code of values and principles that enables a person to choose between right and wrong, and
therefore, select from alternative courses of action. Further, ethical dilemmas arise from
conflicting interests of the parties involved. In this regard, managers make decisions based on
a set of principles influenced by the values, context and culture of the organization. Ethical
leadership is good for business as the organization is seen to conduct its business in line with
the expectations of all stakeholders.
Corporate governance is beyond the realm of law. It stems from the culture and mindset of
management, and cannot be regulated by legislation alone. Corporate Governance deals with
conducting the affairs of a company such that there is fairness to all stakeholders and that its
actions benefit the greatest number of stakeholders. It is about openness, integrity and
accountability. What legislation can and should do is to lay down a common framework the
form to ensure standards. The substance will ultimately determine the credibility and
integrity of the process. Substance is inexorably linked to the mindset and ethical standards of
Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices. In this regard, the management needs to act as trustees of the

shareholders at large and prevent asymmetry of benefits between various sections of bank
customers and shareholders, especially between the owner-managers and the rest of the
Corporate governance is a key element in improving the economic efficiency of a bank. Good
corporate governance also helps ensure that corporations take into account the interests of a
wide range of constituencies, as well as of the communities within which they operate.
Further, it ensures that their Boards are accountable to the shareholders. This, in turn, helps
assure that corporations operate for the benefit of society as a whole. While large profits can
be made taking advantage of the asymmetry between stakeholders in the short run, balancing
the interests of all stakeholders alone will ensure survival and growth in the long run. This
includes, for instance, taking into account societal concerns about their welfare and the
environment as a part of corporate social responsibility.

Debut of Corporate Governance in Indian banks:

As a prelude to institutionalize Corporate Governance in banks, an Advisory Group on
Corporate Governance was formed under the chairmanship of Dr. R.H. Patil. Following its
recommendations in March 2001 another Consultative Group was constituted in November
2001 under the Chairmanship of Dr. A.S. Ganguly: basically, with a view to strengthen the
internal supervisory role of the Boards in banks in India. This move was further reinforced by
certain observations of the Advisory Group on Banking Supervision under the chairmanship,
Shri M.S. Verma which submitted its report in January 2003. Keeping all these
recommendations in view and the cross-country experience, the Reserve Bank initiated
several measures to strengthen the corporate governance in the Indian banking sector.
Indian banking system consists of Public/Private sector banks having a basic difference
between them as far as the Reserve Banks role in governance matters relevant to banking is
concerned. The current regulatory framework ensures, by and large, uniform treatment of
private and PSBs in so far as prudential aspects are concerned. However, some of the
governance aspects of PSBs, though they have a bearing on prudential aspects, are exempt
from applicability of the relevant provisions of the Banking Regulation Act, as they are
governed by the respective legislations under which various PSBs were set up. In brief,
therefore, the approach of RBI has been to ensure, to the extent possible, uniform treatment of
the PSBs and the private sector banks in regard to prudential regulations.

In regard to governance aspects of banking, the Reserve Bank prescribed its policy framework
for the private sector banks. It also suggested to the Government the same framework for
adoption, as appropriate, consistent with the legal and policy imperatives in PSBs as well.
Hence the endeavor is to maintain uniformity in policy prescriptions to the best possible
extent for all types of banks.
Since role of Independent Directors form the basis for effective implementation of corporate
governance in banks, it is necessary to reproduce the code of conduct prescribed under
SCHEDULE IV [section 149(7)] as prescribed in Companies Bill 2012 for the guidance to the
companies. These are reproduced from the Companies bill 2012.

Setting Fit and proper criteria for Directors of banks:

Taking cue from the recommendations of the Ganguly Committee Report, the concept of fit
and proper criteria for directors of banks was formally enunciated in November 2003. It
included the process of collecting information, exercising due diligence and constitution of a
Nomination Committee of the Board to scrutinize the declarations made by the bank directors.
Accordingly, all the banks in the private sector have carried out, through their nomination
committees, the exercise of due diligence in respect of the directors on their Boards. In some
cases, where the track record of the directors was not considered satisfactory, the directors
vacated their positions. In regard to some others, there is an on-going process to ensure fit
and proper status of the directors.
In this regard, it may be useful to distinguish the issue of the composition of the Board from
the fit and proper status of individual non-executive directors and chief executives. The first
relates to collective expertise on the Board available to meet the competitive challenges before
the bank to ensure commercial activity while maintaining soundness. The existing legal
provisions in regard to banks stipulate specific areas of background that a director should be
drawn from. The Directors should be from professional areas such as accountancy, banking,
economics, finance, agriculture, etc. But it does not specify the extent or degree of
professionalism or expertise required in regard to that area. Hence, it is left to the good faith of
the shareholders to elect directors from the various specified areas with qualifications and
experience that is appropriate to the bank. In regard to PSBs, such good faith is expected when
directors are nominated by the Government.


However, when the issue of fit and proper status of non-executive directors comes up, the
norms only seek to ensure that the candidate should not have come to the adverse notice of the
law and regulations or any professional body so that there is no objection from RBI. In the
case of non-executive directors not satisfying the fit and proper criteria, there is a prescribed
due process to be followed by the RBI to disqualify such directors, which includes
opportunities to be heard. The position in regard to the CEOs of the private sector banks is on
a different footing where RBI exercises its judgment on the suitability of the candidates
proposed; in as much as the approval of the RBI is required for the appointment. These
provisions are broadly consistent with global best practices though there is scope for
enhancing effective implementation.
Keeping in view the importance of Corporate Governance even in PSBs, the Government of
India at the behest of RBI carried out amendments to the Banking Companies (Acquisition
and Transfer of Undertakings) Act 1970/1980 and the State Bank of India (Subsidiary Banks)
Act 1959 to include new sections providing for applicability of Fit and Proper criteria for
elected directors on the Boards of PSBs. Accordingly guidelines were issued in Nov 2007 to
prescribe Fit and Proper criteria to be fulfilled by the persons being elected as directors on
the Boards of Nationalised banks under the provisions of Section 9(3)(i) of Banking
Companies (Acquisition and Transfer of Undertakings) Act 1970/80.
Continuing surveillance of Fit and Proper criteria is maintained on continuous basis. Under
these provisions, Nationalised banks are required to form a committee consisting of minimum
three directors (all independent and non-executive directors) from amongst the Board of
Directors to examine and certify that none of these directors disqualify for being Fit and
proper. Moreover, in some banks directors are also exposed to high level of training to fine
tune their expert domains to enable them to more effectively contribute to the governance of
banks. The Corporate Governance systems have evolved over a period of time to cover all
types of banks to develop a sound and strong financial system. After the Corporate
Governance System is established in banks, there could be conspicuous change in the quality
of governance.

SEBI Guidelines on corporate Governance in Banks:

The Securities and Exchange Board of India (SEBI) had constituted a Committee on
Corporate Governance and circulated the recommendations to all stock exchanges for

implementation by listed entities as part of the listing agreement vide SEBIs circular
SMDRP/Policy/CIR-10/2000 dated February 21, 2000. However it had at that time exempted
body corporates such as public and private sector banks, financial institutions, insurance
companies and those incorporated under separate statute. SEBI has now suggested to RBI to
consider issuing appropriate guidelines to banks and financial institutions so as to ensure that
all listed companies would have uniform standards of corporate governance. As requested by
SEBI, it has now been proposed that the SEBI Committees guidelines may be taken up for
adoption by those commercial banks listed in stock exchanges so that they can harmonize
their existing corporate governance requirements with the requirements of SEBI, wherever
considered appropriate.
On a review by RBI of the existing corporate governance requirements in banks, it is observed
that many of the recommendations in regard to the following stand implemented in banks and
may not require further action towards implementation in respect of these guidelines for the
(a) Optimum combination of executive and non-executive directors in the Board
(b) Pecuniary relationship or transactions of the non-executive directors vis--vis the bank
(c) Independent Audit Committees, their constitution, chairmanship, power, roles,
responsibilities, conduct of business, etc
(d) Remuneration of Directors (in case of private sector banks)
(e) Periodicity /number of board meetings
(f) Disclosure by management to the board about the conflict of interest
(g) Information to shareholders regarding appointment/re-appointment of directors,
Display of quarterly results/presentation to analysts on the web- site
h) Maintenance of office by non-executive Chairman.
i) Reviewing with the management by the Audit Committee of the board the annual
Financial statements before submission to the Board, focusing primarily on:
Any changes in accounting policies and practices,

Major accounting entries based on exercise of judgment by management,

Qualifications in draft audit report,
Significant adjustments arising out of audit, compliance with accounting
Compliance with stock exchange and legal requirements concerning financial statements, and
The going concern assumption.
The Audit Committee of the board may look into the reasons for default in payment to
depositors, debenture holders, shareholders (non-payment of dividends) and creditors,
wherever there are any cases of defaults in payment. SEBI Committees recommendations on
other additional functions to be entrusted to the Audit Committee may be complied with by
the listed banks as per listing agreement.
As regards the appointment and removal of external auditors, the practice followed in banks is
more stringent than that recommended by the Committee and hence will continue. Further,
fixation of audit fee and also approval of payment for any other services are already subject to
the instructions of RBI. As regards recommendation for obtaining a certificate from auditors
regarding compliance of conditions of Corporate Governance, it may be stated that the
compliance of banks with RBI instructions is already being verified by the statutory auditors.
Therefore, a separate certificate from the auditors is not considered necessary.
With a view to further improving the Corporate Governance standards in banks, the following
measures are now recommended for implementation.
(a) In the interest of the shareholders, the private sector banks 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 a non-executive director to look into redressal of shareholders'
(b) All listed banks may provide un-audited financial results on half yearly basis to their
shareholders with summary of significant developments.

Impact of Corporate Governance norms in banks:


The RBI move to strengthen Corporate Governance led to seminal changes in the bank
administration. The sustained profitability, lower level of non-performing assets, improved
return on assets etc are some of the laud indicators of the sustaining policy of operating sound
banking system. Moreover, the movement of share prices in the market, increased appetite of
investors to look at banks for investment in bank centric equity market further speaks of broad
market opinion of banks performance and reflection of market confidence. The corporate
governance framework in banks has been strengthened through regulation, supervision and by
maintaining constant interaction with the management. They cover identification of
responsibilities of the Boards of banks, disclosure and transparency in published accounts, and
shareholder and stakeholder rights and controls. The rating on management (M) which has
been introduced as part of the CAMELS (Capita, Asset Quality, Management, Earnings,
Liabilities and Systems) supervisory process takes into account the working of the board and
its committees including the Audit committee, effectiveness of the management in ensuring
regulatory compliance and adequacy of control exercised by the head/controlling offices. This
model has been further modified to include risk based supervision. The new evolution is
intended to manage influx of a range of financial risks entering the market with their nuances.
Moreover, the audit function is an important element of the corporate governance process and
the independence of this function is crucial to good corporate governance. Audit Committee of
the Boards, constituted at the instance of RBI; performs the role of overseeing concerns about
internal controls and recommendations for their improvement. In order to ensure both
professionalism and independence of these committees, Chartered Accountant directors on the
boards of banks are mandatory members and the Chairman or Chief Executive Officer is not
to be part of the Audit Committee. Foreign banks are not insisted upon to have local audit
committee for their Indian branches. Their branches can have a compliance function that
reports to their head office on the branches compliance with RBI inspection findings and
features arising out of internal inspections and statutory audit. RBI has Nominee directors on
the boards of all PSBs and some of the old private sector banks. Further, the Government also
nominates directors on the boards of all PSBs. Of late, RBI has been withdrawing its
nominees from the boards of well-managed old private banks.
In order to improve the effectiveness of the non-official directors and bring in effective
corporate governance at the board level in banks, guidelines have been issued focusing the
attention of directors on certain areas such as


the prescribed calendar of reports / returns to be placed before the Board / Managing
Committee of the bank
corrective action required to be taken by the bank on issues of supervisory concern
adherence to the deadlines for complying with various action points committed under
Monitorable Action Plan during discussions in Annual Financial Inspection findings as well as
achievement of targets agreed during Memorandum of Understanding (MOU) discussions
with RBI.
Further, the guidelines also require the directors to keep watch on matters which come to the
board of the banks as also what should have come to the board and to inform the Department
of Banking Supervision on matters of supervisory concern.

Impact of Corporate Governance Policies in Banks:

Post reform period led to many banks accessing capital market to shore up their capital
adequacy ratio, an essential prescription of Basel-I then and Basel II now. Subscription of
banks equity is a function of public confidence which stems from governance policies. The
Red Herring Prospectus lodged by banks as required by the capital market regulator, the
Securities and Exchange Board of India (SEBI) reflects not only the numerical performance of
banks as enunciated in Section-I of this paper but is also an indicator of present and future
governance policies pursued by banks.
The movement of stock prices is a further reflection of demand and supply of bank shares in
the stock market. The entry of new Private Sector Banks and PSBs accessing capital market
opened up new opportunities to the investors. It was heartening to note that in the next few
years, the bank shares had picked up demand and popularity.
The spurt in the capital market index is a manifestation of investor opinion on the
performance, potential and standard of governance of banks. Though there may not be direct
correlation between market movement of bank shares and corporate governance policies, the
overall long run market opinion precipitates on this basis. Such practices form the
fundamental strength of the banks and their ethical commitments. As the risk perception
changes, volume of business goes up, new line of activities spur, competition heightens
further, the Corporate governance practices need to be fine tuned to meet the emerging

Learning from the Corporate Governance:

Several large global economies have been experiencing the ramifications of some well
publicized instances of failure of large corporate entities/Banks/Financial institutions of repute
putting the stakeholders/society at risk. Instances of failure of well functioning commercial
banks are a big threat to the civilized society across the globe which needs to be curbed with
appropriate code of corporate governance policy reforms. With the advancement of science of
management, the governance should logically get fine tuned to sustainably operate in the
emerging globalised world to do more good to the society.
Corporate governance across the globe is omnipotent to create a culture of sustainable growth.
Hence every promising organization including banks which has a vision imbibes best
practices in corporate governance to provide sustainability and healthy growth. The challenge
is to groom the management to balance between temptations to flout ethical standards in
exchange for short term gains. Such temptations step by step can build up into weaknesses
which have the potentiality to perish the banking organizations built strongly over a period of
time by great leaders. Hence, the acid test for the Board team is to build a management
stream that can strengthen the fence of moral and ethical values.
The world has witnessed in the global crisis in 2008 that the organizations such as Lehman
Brothers are vulnerable to high risk in an upbeat economic environment. The incidence of
failure of institutions increased during the period further reinforcing the need to strengthen the
process of dissemination of steady principles of corporate governance so as to protect the
companies from failing.

Road ahead:
Corporate Governance is a mission intended to create strong fundamentals for the banks. With
changing dimensions of corporate governance practices banks need to transform into much
more dynamic and forceful entities setting a broad vision for the future. It will be more
significant in the wake of the recent global financial turmoil which had taken heavy toll of
several financial conglomerates. Many investment banks, commercial banks and financial
institutions across the globe had to file bankruptcy petitions and vanished from the market.
The reasons are definitely a focus on achieving short term business goals often ignoring the
long term goals of the organization. The philosophy of Corporate Governance spells out the
long term sustainability with strong fundamentals.

The ownership and governance of banks assume special significance as they accept and
deploy large amount of uncollateralized public funds and leverage them through credit
creation. Banks also participate in payment mechanism. However the two major concerns
arose in the Indian context regarding Corporate Governance in banks. These were
concentration of ownership and the quality of management that controlled the bank.
Regulation of private banks was crucial in view of the fact that the owner shareholders of the
banks had only a minor stake and considering the leveraging capacity of banks, it puts them in
control of a very large volume of public funds of which their own stake is miniscule.
In terms of recommendations of Narasimham committee I (1991) and Narasimham
Committee II (1997), the government may dilute its holdings to bring them below the current
threshold limit of 51 per cent on way to move towards 33 percent in PSBs. Even then efforts
to institute good governance practices would remain important. Moreover, the government
may have to redefines its role de novo in running the banks. Even now the micro management
of Banks remains with the banks Boards. The changes proposed in the composition of the
boards as per legislation under contemplation would result in government directly appointing
9 out of the 15 directors including the 4 whole time directors.
Moreover, the restrictions on the voting rights of shareholders will limit the basic principle of
equal rights to all the shareholders. The rights of private shareholders' of PSBs are skewed
considerably, since their approval is not required for paying dividend or for adopting annual
accounts. On the other hand the subsidiaries of the SBI enjoy very limited board autonomy as
they have to get clearance on most of the important matters from the parent even before
putting them up to their boards.
Further, as things stand today, there is no equality among the various board members of the
PSBs. Nominees of RBI and Government enjoys a better command and is treated to be
superior to other directors. Another major problem affecting banks has been the representation
given to the various interest groups on the boards of the banks. The main objective behind
these representations was to give voice to various sections of the society at the board level of
the banks. Hence, a major reform is needed in the area of constitution of the boards of the
banks. The Chairmen, Executive Directors and non-executive directors on the boards of the
PSBs (including Chairman, Managing Director, Deputy Managing Director of the SBI and its
subsidiaries) need to be appointed on the advice of an expert body set up on the lines of the


UPSC, with similar status and independence. Such a search committee is generally set up
jointly by RBI and the Ministry of Finance.
All the objectives that the banks are supposed to achieve should become an integral part of the
corporate mission statements of these institutions. Banks pursue these goals relentlessly to
gain new heights. Although RBI maintains a tight vigil and inspects these entities thoroughly
at regular time intervals, the quality of corporate level governance mechanism does not appear
to be satisfactory. In its role as the regulator, RBI has representation on the bank boards, given
the fact that it has the role to protect the interests in line with its regulatory functions. This
applies even in the case of SBI where RBI is the major shareholder. Further, any policy
measures to protect banks that are less careful in their lending policies need appropriate
intervention to protect the banks in such a way that they do not encourage profligate lending
by banks.
Current regulatory provisions do not permit a bank to lend money to a company if any of its
board members is also a director on the board of that company. The negative impact of this
rule has been that the banks are not able to get good professionals for their boards. The banks
are required to induct independent directors in their board to promote professional functions.
The current rule may, however, be continued only in respect of directors of companies who are
their promoters and have a stake in their companies beyond being merely a director. In the
interest of good governance, it may therefore be desirable that government directors should
not participate in the discussion on such matters and also abstain from voting.
The future course of corporate governance may provide suggestive agenda to PSBs to
strengthen them to eventually imbibe global best practices, needed more in the context of
integration of Indian banking system with the rest of the world. Corporate governance in PSBs
is more challenging as they are governed by the government on one side, RBI and SEBI on
the other side. With banks now forging into other wealth management areas covering
insurance and sale of third party products, many other regulators may also enter their domain.
Balancing the needs and prescriptions of different regulators calls for enhanced prudence and
stable ethical policies so that stake holders interest is protected. The directors will have to
play a restrained role to avert any over governance.
The top management and board of directors constantly work towards improving the quality of
corporate governance in PSBs. One of the major factors that impinge directly on the quality of

corporate governance is the government ownership. It is desirable that all the banks are
brought under a single Act so that the corporate governance regimes do not have to be
different just because the entities are covered under multiple Acts of the Parliament or that
their ownership is in the private or public sector. The ownership of banks and accountability to
run them should vest preferably with single agency. The future challenges will unfold a range
of transformation in the system of corporate governance so that the quality of performance of
banks and public confidence is maintained high.

Need for Corporate Governance in Banking System:

Banks are critical components of the economy while providing finance for commercial
enterprises, basic financial services to a broad segment of the population and access to
payment systems. Banks in India are facing increasing competition, within and outside India,
both in terms of markets for its products and for sources of fund.
The importance of banks to national economies is underscored by the fact that banking is,
almost universally, a regulated industry and that banks have access to government safety nets.
In order to meet the statutory need of having sound Capital Adequacy requirements, banks are
accessing the Capital Market at regular intervals. Hence the banks need to stimulate the
interest of investors at all times. Investors believe that a bank with good governance will
provide them a safe place for investment and also give netter returns. Good corporate
governance is therefore an important factor in a competitive environment. Investors,
customers, employees and vendors have all become more discerning and are demanding
greater transparency and fairness in all dealings. To attract and retain the commitment of
investors, customers, employees, Banks should ensure that they match the global benchmark
in Corporate Governance Practices.
Banks are also important catalysts for economic reforms, including corporate governance
practices. Because of the systemic function of banks, the incorporation of corporate
governance practices in the assessment of credit risks pertaining to lending process will
encourage the corporate sector in turn to improve their internal corporate governance
practices, importance of implementing modern corporate governance standards is conditioned
by the global tendency to consolidation in the banking sector and a need in further
capitalization. It is of crucial importance therefore that have strong corporate governance

Banks, just like any other organization are incorporated entities. As a result of which, the
primary requirements of corporate governance apply to them as any other incorporated entity.
Added to this certain features that are very specific to banks, adds on to the importance of
Corporate Governance issues in banks.
Among other features, the most important one is the fact that banks form an integral part of
the economy of the country, and any failure in a bank might have a direct bearing on the
financial health of the country. Banks, help in channelizing the peoples saving.
The capital structure of bank is unique in two ways. First, banks tend to have very little equity
relative to other firms. Second, banks liabilities are largely in the form of deposits, which are
available to creditors/depositors on demand, while their assets often take the form of loans that
have longer maturities. Thus, the principle attribute that makes banks as financial
intermediaries special is their liquidity production function. By holding illiquid assets and
issuing liquid liabilities, banks create liquidity for the economy. The liquidity production
function may cause a collective-action problem among depositors because banks keep only a
fraction of deposits on reserve at any one time. Depositors cannot obtain repayment of their
deposits simultaneously because the bank will not have sufficient funds on hand to satisfy
depositors at once. This mismatch between deposits and liabilities becomes a problem in the
unusual situation of a bank run.
The second important driver of a good corporate governance stems from their funding
patterns. Banks, by their basic definition are highly leveraged financial institutions, with the
equity capital of the shareholders being reduced to a miniscule proportion of loan capital in
the form of borrowing and deposits of deposits from customers of the bank. As a result of this,
the stakeholders in banks, (mainly the depositors and lenders) have a rightful claim of
accountability from the banks and their boards.
The third important element in the Corporate Governance structure relates to the control
function. It is imperative to discuss the same in brief. Control functions in banks deal with
internal frauds as well as external frauds. The former relates to situations where the banks own
personnel indulge in corrupt and unethical practices. The latter deals with situations where the
customers of the bank try to seek for malpractices. The incidents of the external frauds are so
devastating that special attention is being mandated both for their prevention as well as their
post scenario analysis. In this connection it is important to remind of the COSO framework
that was framed with this intention in mind.

Finally, failing to comply with stipulated norms can be one of the challenging issues of
Corporate Governance framework. With Banks being under intense watch of the central bank
as well as other regulatory bodies, it is a common observation, that most failures (crashes) in
banks have occurred due to compliance failure situations. With a lot of reports and norms,
being introduced (The Basel II norms being the latest of them), failure to adhere to the
regulatory norms have never reduced.

BASEL II Recommendation:
The Basel Committee on Banking Supervision is a committee, of banking supervisory
authorities, established by the Central Bank Governors of the G10 developed countries in
1975. The Committee in 1988 introduced the Concept of Capital Adequacy framework,
known as Basel Capital Accord, with a minimum capital adequacy of 8 percent. It also issued
a consultative document titled The New Basel Capital Accord in April 2003, to replace the
1988 Accord, which re-enforces the need for capital adequacy requirements under the current
conventions. This accord is commonly known as Basel II and is currently under finalization.
Basel II is based on three pillars:
Pillar 1 Minimum Capital Requirements
Pillar 2 Supervisory Review Process
Pillar 3 Market Discipline

Enhancing Corporate Governance in Banks

The Basel committee had issued, in August 1999, a guidance paper entitled Enhancing
Corporate Governance for Banking Organizations to supervisory authorities worldwide to
assist them in promoting the adoption of sound corporate governance practices by banks in
their countries

Importance of Corporate Governance for Banks

From a banking industry perspective, corporate governance involves the manner in which
their boards of directors and senior management govern the business and affairs of individual
banks, affecting how banks set their corporate objectives, run day-to-day operations, consider
the interests of various stakeholders, align corporate activities with the expectation that banks


will operate in a safe and sound manner and in compliance with applicable laws and
regulations and protect the interests of depositors.

Sound Corporate Governance Practices for Banks

According to the paper some of the best corporate governance practices for banks include
establishing strategic objectives and a set of corporate values communicated throughout the
organization, strong risk management functions, special monitoring of risk exposures, setting
and enforcing clear lines of responsibility, etc.

Role of RBI In Promoting Corporate Governance:

The growing competitiveness and interdependence between banks and financial institutions in
local and foreign markets have increased the importance of corporate governance and its
application in the banking sector. Corporate governance in banks can be achieved through a
set legal, accounting, financial and economic rules and regulations. To make sure that the
competence and integrity in banking sector is maintained, the need for uniform standards of
the concept of governance in private and public sector is emphasized. The regulatory
framework implemented by the central bank can affect the overall well being of banking

Best Practices of Banking System In Corporate Governance: Good governance

can be built based on the business practices adopted by the board of directors and
management. Many bank failures in the past have been attributed to inadequate and
insufficient management which enabled the banks to accept low quality assets and assume
additional risks that extend beyond the level appropriate for the banks capacity.

Important commandments for ensuring corporate governance in banks are:

Banks shall realize that the times are changing
Banks shall establish an Effective, Capable and Reliable Board of Directors
Banks shall establish a Corporate Code of Ethics for themselves
Banks shall consider establishing an office of the Chairman of the Board
Banks shall have an effective and Operating Audit Committee, Compensation Committee and
Nominating/ Corporate Governance Committee

Banks shall consider Effective Board Compensation

Banks shall disclose the information
Banks shall recognize that duty is to establish Corporate Governance Procedures that will
serve to enhance shareholder value

Recent Scenario
Recent steps taken by Banks in India for Corporate Governance are:
Introduction of non executive members on the Board
Constitution of various Committees like Management Committee, Audit Committee,
Investors Grievances Committee, ALM Committee etc.
Gradual implementation of prudential norms as prescribed by RBI
Introduction of Citizens Charter in Banks
Implementation of Know Your customer (KYC) concept.


State Bank of India is the countrys largest commercial bank in terms of profits, assets,
deposits, branches and employees. With over 200 years of existence, State Bank group has a

presence in 33 countries and extensive network of more than 18,000 branches and 26,000 plus
ATMs and 100 million accounts across the country. The only Indian Bank to feature in the
Fortune 500 list, SBI has 5 Associate banks and 7 Subsidiaries arguably the largest in the
world. With millions of customers across the country, SBI offers a complete range of banking
products and services with cutting edge technology and innovative banking model. State Bank
of India is committed to the best practices in the area of corporate governance. The sound
corporate governance practice in State Bank of India would lead to effective and more
meaningful supervision and could contribute to a collaborative working relationship between
bank management and bank supervisors. Based on different elements like boards practices,
stakeholders services and transparent disclosure of information the practice of corporate
governance in state bank of India was assessed.

Central Board The central board of directors was constituted according to 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 maximising the interests of its
stakeholders. The central board has constituted seven board level committees.

Audit Committee of the Board: ACB provides direction as well as oversees the
operation of the total audit function in the bank. Total audit function implies the
organizational, operational, quality control of internal audit and inspection within the bank,
follow-up on the statutory audit and compliance with RBI inspection. It also appoints statutory
auditors of the bank and reviews their performance from time to time.ACB reviews the banks
financial, risk management, IS audit policies and accounting policies of the bank to ensure
greater transparency.

Risk Management Committee of the Board: RMCB was constituted to oversee the
policy and strategy for integrated risk management relating to credit risk, market risk and
operational risk.

Shareholders/Investors Grievance Committee of the Board : SIGCB was

formed to look into the redressal of shareholders and investors complaints regarding transfer


of shares, non-receipt of annual report, non-receipt of interest on bonds/declared dividends,


Special Committee of the Board for Monitoring of Large Value Frauds: The
major functions of the committee are to monitor and review all large value frauds with a view
to identifying systemic lacunae, if any, reasons for delay in detection and reporting,
monitoring progress of CBI / Police investigation, recovery position and reviewing the
efficacy of remedial action taken to prevent recurrence of frauds.

Customer Service Committee of the Board: CSCB was constituted to bring about
ongoing improvements on a continuous basis in the quality of customer service provided by
the bank.

IT Strategy Committee of the Board: With a view to tracking the progress of the
banks IT initiatives, the SBIs central board constituted a technology committee of the board.
The committee has played a strategic role in the banks technology domain.

Remuneration Committee of the Board: It was constituted for evaluating the

performance of whole time directors of the bank in connection with the payment of incentives,
as per the scheme advised by Government of India. It is found that in SBI, these committees
are providing effective professional support in the conduct of board level business in key

The SBI strongly believes that all stakeholders should have access to complete information on
its activities, performance and product initiatives.

Shareholders: The SBI is providing different types of services and facilities to the
shareholders. Share transfers in Physical form are processed and returned to the shareholders
within stipulated time. SBI has the distinction of making uninterrupted dividend payment to
the shareholders at an increasing rate for many years. In accordance with the SEBI guidelines
on green initiative in corporate governance, SBI is issuing annual report in electronic form to
shareholders who opt for receiving the same in electronic form through their e-mails. To meet
various requirements of the investors regarding their holdings, the Bank has a full-fledged


department i.e. shares and bonds department and shares and bonds cells at the 14 local head

Customers: With a large network and number of branches throughout India and abroad SBI
is providing different types of services and facilities to the customers.

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.

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.

Internet Banking: Internet banking service is available through for

both retail and corporate customers of the bank. The number of customers in March 2011 was
62.57 lakhs and they increased to Corporate Governance in Banking Sector: A Case study of
State Bank of India 18 | Page 89.63 lakhs in March 2012. The number
of transactions during 2010-2011 was 1437.46 lakhs and in 2011-12 it increased to 2610.32

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.

Customer Complaints: The number of complaints received from the customers during
the year 2010-11 was 30,904 and they increased to 462,381 during 2011-12.

Employees: The SBI had a total permanent staff strength of 2,15,481 in the March, 2012.
Of this, 80,404 (37.32%) were officers, 95,715(44.42%) were clerical staff and the remaining

39,362 (18.26%) were sub-staff. It has been decided to recruit 9500 new clerical staff during
the year 2012-13 to meet the growing business needs of the bank. The SBI has transferred Rs.
49,518 crores to the SBI employees pension fund trust from the special provision account,
during the year 2011-12. An amount of Rs. 4531.83 crores is recognised as an expense
towards the provident fund scheme of the bank. The bank has implemented a defined
contribution pension scheme (DCPS). The contributions of the bank of Rs. 452.47 crores have
been retained as a deposit with the bank and earn interest at the same rate as that of the current
account of provident fund. An amount of Rs. 4531.33 crores (previous year 4775.74 crores) is
provided towards long term employee benefits.

Society: The executive committee of the central board has approved a comprehensive policy
for corporate social responsibility in August 2011. During the year 2011-12 the SBI has spent
Rs. 71.18 crores for various social service activities like supporting education (Rs. 35.33
crores), Healthcare (Rs. 15.03 crores) and donations (Rs. 5.50 crores).


Disclosure and transparency are the important pillars of a corporate governance framework
enabling adequate information flow to various stakeholders and leading to informed decisions.
The SBI was implementing all the provisions of corporate governance and disclosure in the
important and confidential information. Table 1 shows confidential information of SBI as a
part of transparent disclosure of information.

Primary Business Segment Information of SBI: In the primary segment the

treasury segment includes the entire investment portfolio and trading in foreign exchange
contracts and derivative contracts; the corporate /whole sale banking segment comprises the
lending activities of corporate accounts group, mid-corporate account group and stressed
assets management group and the retail banking segment comprises of branches in national
banking group, which primarily includes personal banking activities including lending
activities to corporate customers. This segment also includes agency business and ATMs.

Secondary Geographic Segments information of SBI: In this segment domestic

operations are branches/ offices having operations in India. Foreign operations are
branches/offices having operations outside India and offshore banking units having operations
in India.the revenue, assets and liabilities based on primary business segment with explaining


treasury, corporate/wholesale banking and retail banking. The geographic segment explains
domestic and foreign areas performance during 2010-11 and 2011-12.

Earnings per share of SBI: The basic earnings per share are computed by dividing the
net profit after tax by the weighted average number of equity shares outstanding for the year.
The net profit in 2010-11 was Rs. 8264.52 crores and it increased to Rs. 11,707.29 crores in
2011-12. Basic earning per share in 2010-11 is Rs. 130.16 and it increases to Rs. 184.31 in

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.

Details of Concentration of Advances, Exposures & NPAs Information of

SBI: Table 3 demonstrates the concentration of deposits, advances, exposures and NPAs
information during 2010-11 and 2011-12. The table explains the operational weaknesses in the
SBI regarding issue of advances to twenty largest borrowers, concentration of exposure with
twenty largest borrowers and concentration of NPAs with four NPA accounts.





Suggestions and Recommendations:

Banks and financial sector being a highly service oriented sector, making corporate
governance effective is a great challenge. More so, when the driving force of commercial
banks is to grab the opportunity, trading profits with only focus on profitability. The levers of
systemic control have to be not only progressively tightened but they are also to be scrutinized
from the point of deliverables. Moreover the recent global financial crisis leading to the
demise of several reputed global investment banks exposes the fissure in the effectiveness of
corporate governance model.
Banking sector is the key for monetary conditions in a country. Due to the special nature of
the activities carried on by the banks, they face a lot of problems as far as the area of corporate
governance is concerned. In the Indian scenario, due to the peculiar nature of bank holdings
there are a lot of embedded conflicts. The guidance paper issued by the Basel Committee is of
paramount significance in enforcing corporate governance standards in various countries
across the world.
Corporate Governance is now identified and acknowledged as a powerful tool to generate trust
and confidence in an institution. The trend in the world of targeting governance practices in
the banking sector to be at the cutting edge of prevailing practices worldwide is a significant
step in the right direction and should continue to be so in the future as well.
India has one of the best Corporate Governance legal regimes but poor implementation. SEBI
has carved out a certain more stringent provisions relating to listed companies as a condition
of the Listing Agreement.
The special nature of banking institutions necessitates a broad view of corporate governance
where regulation of banking activities is required to protect depositors. In developed
economies, protection of depositors in a deregulated environment is typically provided by a
system of prudential regulation, but in developing economies such protection is undermined
by the lack of well-trained supervisors, inadequate disclosure requirements, the cost of raising
bank capital and the presence of distributional cartels. Due to special nature of the activities
carried on by the banks, they face a lot of problems as far as the area of corporate governance
is concerned. Also, in the Indian scenario, due to the peculiar nature of bank holdings there are

a lot of embedded conflicts. There exists a doubt as to what standard should be applied while
enforcing corporate governance in banks. Central banks play an important role in this regard.
As far as best corporate governance practices for banks are concerned, they may include
realization that the times are changing, establishing an effective, capable and reliable board of
directors, establishing a corporate code of ethics by the banks for themselves, considering
establishing an office of the chairman of the board, having an effective and operating audit
committee, compensation committee and nominating/ corporate governance committee in
place, considering effective board compensation, disclosing the information and recognizing
their duty to establish corporate governance procedures that will serve to enhance shareholder
Finally this study concluded that, the corporate governance practices in the banking and
financial sector in India should improve for best investment policies, appropriate internal
control systems, better credit risk management, better customer service and adequate
automation in order to achieve excellence, transparency and maximization of stakeholder
value and wealth.
It is a daunting challenge to make Corporate Governance effective in a highly complex
business oriented environment of banks and financial sector. More so, when the driving force
of commercial banks is to grab the arbitrage opportunity, trading profits with unstinted focus
on profitability. The levers of systemic control have to be not only progressively tightened but
they are also to be scrutinized from the point of deliverables. Moreover the recent global
financial crisis leading to the demise of several reputed global investment banks exposes the
fissures in the effectiveness of corporate governance model.
The implementation of corporate governance norms in Indian banks have been phenomenal
after the bank reforms were put in place. With the initial framework of Ganguly committee,
there has been a consistent focus on fit and proper standards. The PSBs have even began to
rate their corporate governance standards from rating agencies. Banks have been working on
sustainability of corporate governance standards and have begun to realize the importance of
corporate social responsibility which is an integral part of it. The multiplicity of regulators,
issues in the appointment of rightly qualified Board members and conflict of interest between
long term and short term objectives always pose bigger challenges.
The recent adverse developments arising out of US sub-prime mortgage market fiasco had
shattered the confidence of investors in the governance of some of the global Banks/FIs.

Investors do search for better yield but it needs to be worked out with prudent investment
policies. The headway success of structured credit that offered high yields with high credit
ratings created a huge demand for quick earning assets. It enabled banks to move from
traditional lend and hold model towards an originate and distribute model. Such shift in
the model led to rise in supply of credit and allowed risk to be more widely dispersed across
the system as a whole. It involved a long chain of participants from the original lenders to end
investors. Investors at the end of the chain bore the final risk, had less information about the
underlying quality of loans than those at the start and become dependent on rating agencies
and their models.
The corporate governance issues of synchronizing perpetual organizational growth objectives
with current aspirations needs to be widely discussed in the international forum of the
conference. This contextual paper should be able to provide not only an insight into the
progress attained so far but will be able to set an agenda and a thinking tool to the policy


The study found that, the SBI is implementing all the provisions of corporate governance
according to the RBI/GOI directions. It is found that State Bank of India, the countrys largest
commercial bank, performed well in every aspect in terms of profits, assets, deposits,
branches, employees and services to customers. The study found that the SBI conducted

different board meetings regularly to provide effective leadership, functional matters and
monitors banks performance. It is found that the SBI established clear documentation and
transparent management processes for policy development, implementation, decisionmaking,
monitoring, control and reporting. Even though the SBI is showing good performance and
implementing provisions of corporate governance, some lapses have to be rectified for
increasing the performance. The SBI is operating nearly 10 crores of customer accounts.
Among them the net banking operating customers are 89.63 lakhs, mobile banking operating
customers 36.45 lakhs, customers using ATMs are 910 lakhs. Though the customers operating
e-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
programmes. 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. Corporate Governance in Banking Sector: A Case study of State Bank
of India 20 | Page 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 2011-2012 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. 2,07,277.40 crores 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 conducting different types of social services activities in different sectors like
education, healthcare and other areas as a part of social responsibility. The amount spent for
this purpose was Rs. 71.18 crores only. It is suggested that the amount must be increased for
social service activities to draw public attention. Finally, this study concluded that, the
corporate governance practice in the State Bank of India should improve for best investment
policies, appropriate internal control systems, better credit risk management, better customer
service and adequate automation in order to achieve excellence, transparency and
maximization of stakeholders value and wealth. State Bank of India needs to ensure good

corporate governance in order to achieve excellence, transparency, maximization shareholders

value and wealth.