Dr. A.S.

Ganguly Committee
(Lesson-10A: BECG)

Prof. C. Anand Faculty IBS, Hyderabad

Contents
This deals with:1. Constitution and Set Up of the Committees 2. Objectives of the Committee 3. Recommendations of the Committee: a. Board of Directors (Constitution, Composition, Independent/Non-Executive Directors, Commonality of Directors of Banks/NBFCs, Responsibilities, Training and Remuneration of Directors. b. Other Issues (Information Flow to/from the Board, Company Secretary, Committees of the Board, Disclosure & Transparency, and Review of Implementation)
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1. Constitution & Set Up of the Committee

The Consultative Group of Directors of Banks and Financial Institutions(FIs) was set up by RBI, under the Chairmanship of Dr. A.S. Ganguly, to review the Supervisory Role of Boards of Banks/FIs and to obtain feedback on the functioning of the Boards vis--vis Compliance, Transparency, Disclosures, Audit Committees, etc. and to make recommendations for making the role of Boards more effective with a view to minimizing risks and over-exposure.

2. Objectives of the Committee

To produce a list of recommendations after review of the existing framework of Boards of Banks and FIs and benchmarking them with International Best practices (enunciated by Basel Committee on Banking Supervision) and other Committees to the extent applicable to Indian Environment.

3. Recommendations of the Committee A. Board of Directors:

(i) Constitution of the Board: The Boards of Banks/Fis are collectively responsible to the depositors and other Stake-holders. The Board delegates the powers to Chairman, MD, EDs, who will be individually responsible. Boards are supposed to shape strategy and monitor performance without involving in the day-to-day affairs. Generally, Banks and FIs shall help the Wholetime Director (CMD and ED) and large-sized nationalized banks will have one more WTD to provide undivided attention to critical areas (RM,HR, etc). The committee recommended that the competence of individual directors be addressed in terms of qualifications, experience and track record and their integrity. A pool of such directors be built up. 5

3. Recommendations of the Committee (contd)

(ii) Composition of the Board: The Boards of Banks/Fis shall
have representation in the areas of Finance, IT, HR, Economics and experience in managing/advising industrial enterprises. (iii) Independent/Non-Executive Directors: The committee recommended the following critical questions to be raised by Ind./Non-Executive Directors in the Board Meetings: Business Strategy including loans and recovery, housekeeping and internal control systems, loan exposures to different sectors/industries, Risk Management system, Internal Audit, Accounting Policy, Senior Management Development, Investor relations, etc.

3. Recommendations of the Committee (contd)

(iv) Commonality of Directors of Banks/Fis: A director on the board of a NBFC could be considered if he/she is (i) Not owner of NBFC, (ii) Not related to the promoter of NBFC and (iii) Not a full-time employee of NBFC. (v) Responsibilities of Directors: The major roles and responsibilities are: (i) Overseeing risk profiles of a co.; (ii) Monitoring integrity of business and control mechanism; (iii) Ensuring that expert management is in place; and (iv) Maximizing the interests of shareholders. Responsibilities to ensure compliance with regulatory framework & social responsibilities include: 1. Delegation of various authorities of Board; 2. Strategic Plan of the Bank; 3. Organization Structure; 4. Economic features of market and competitive environment; 5. Financial controls and systems; 6. Meeting with key management team. 7

3. Recommendations of the Committee (contd)

(vi). Training to Directors: Directors should be exposed to need based training through training sessions, seminars, workshops etc. to acquaint with emerging developments/challenges being faced by the Banking sector. RBI should take initiative in this regard. (vii) Remuneration to Directors: It should be sitting fees plus basic salary, performance bonus, and Options (ESOPS) to the directors commensurate with time devoted.

B. Other Issues:
(i) Prohibition flowing from Sec.20 of B.R. Act, 1949: There is statutory prohibition under above act to restrict grant of loan to a company in which one or more of the directors of the bank are interested. But such restrictions are not there internationally if there are full disclosures by the interested directors and appropriate covenants are imposed by the banks. Committee recommends that we 8 may move towards that goal.

3. Recommendations of the Committee (contd)

(ii) Information Flow to/from the Board: The effectiveness of the Boards largely depends upon flow of information to/from the Board. The information furnished to the Board shall be adequate and complete for taking meaningful decisions. The observations, dissents made shall be recorded and brought out in proceedings for implementation. (iii). Company Secretary: Banks should appoint a qualified company secretary as the Secretary to the Board and a compliance officer to ensure compliance with regulatory and accounting requirements.

3. Recommendations of the Committee (contd) (iv) Committees of the board: a. Supervisory Committee: It will work on collective trust without diluting the overall responsibility of the Board and monitors the credit and investment exposures of Banks and reviews adequacy of risk management process, internal control systems and ensures compliance with statutory/regulatory framework. b. Audit Committee of the Board. It looks into accounting role and overall management audit and will have a Chairman (Need not be CA) and majority of independent/Non-EDs with one of the Eds as one of the members.

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3. Recommendations of the Committee (contd)

c. Nomination Committee: It is for appointing independent / Non-EDs of Banks to scrutinize nominations with reference to their qualifications, experience, etc. Public Sector Banks issuing public issue should have this committees. d. Shareholders Redressal Committee: The matters relating to investors and shareholders complaints and grievances may be looked into at this higher level to build up credibility. e. Risk Management Committee: This committee is required to be set up as per the Risk Management guidelines issued by RBI for mitigating Credit and Market Risk, besides mitigating risk arising from exposure to inter-connected entities.
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3. Recommendations of the Committee (contd)

(v)

(vi)

Disclosure and Transparency: The Committee recommends that the following disclosures be made by Banks to Boards at regular intervals:- (i) Progress made in risk management system, risk management policy and strategy followed by the Bank (ii) Exposure to related entities viz. details of lending to/investments in subsidiaries, the asset classification of such lendings / investments. (iii) Conformity with CG standards structure, various committees, etc. Review of Implementation: For the implementation of the recommendations of Ganguly Committee, the banks should be asked to come up with a strategy. Once the strategy is received from all Banks, progress of implementation could be reviewed after 12 months; there-after it could be reviewed half-yearly. *The End*
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