Essay: Corporate Governance: Need of an Hour for Co-operative Banks



CORPORATE GOVERNANCE IN CO-OPERATIVE BANKS- NEED OF AN HOUR

The economies of the different countries are approaching closure and forming world economy. The financial system is blood of the economy. The banking and other financial channels are blood veins of these economies. The strength of any country depends upon health of the banking business. The different countries have different financial systems and procedures resulting into hassle in international settlements. The Basel Committee on Banking Supervision was formed as the Committee on Banking Regulations and Supervisory Practices by the central-bank Governors of group of ten countries at the end of 1974 in the aftermath of serious turbulence in international monetary and banking markets (notably the failure of Bankhaus Herstatt in West Germany) and propounded Basel I, II and presently IIIrd accord for the internationally exposed banks.

Before 1991, the banks in our country were carrying on their banking business by showing their profits on accrual basis and not on cash basis. We have since accepted the policy of liberalization, privatization, and globalization. This has accelerated the pace of financial reforms in our country. These reforms have affected not only nationalized, private but also co-operative banking sector. The banks are now required to frame policies to become convergent in international financial market.

Banking is the business of accepting deposits for the purpose of lending and investment. The banking business is subject to risk not only in accepting more and more deposits but also in deploying its funds in advancing credit to the general public and making investment. The major funds of the bank are deployed in the credit portfolio. Imposition of prudential norms from 1993 and tightening the same further onwards by the Reserve Bank of India (RBI) from time to time thereafter has resulted in highest pressure on the profits of the banking institutions. The reduction in the interest rates on deposits, advances and securities has also raised the pressure on the spread of the banks. The RBI has decided to tighten the same till fulfillment of the desired norms by all the financial institutions in order to achieve the first and paramount object specified by Basle Committee i.e. to strengthen the soundness and stability of the banking system with international standards thereby helping financial sector to sustain in the international financial market. The development in information and technology in banking industry in last two decades also plays pivotal role in the stiff competition amongst the private, public and co-operative banks. There is a vast difference in size of business, demographical existence, nature of customers, capital, exposure limits, management etc. The regulatory authorities have applied same norms for the co-operative banks and private, public sector banks in most of the parameters.  

Some of the states in India, such as Maharashatra, Gujarat and Southern states of the country, the co-operative banking plays vital role in the banking sector.  Presently, —- co-operative banks are in existence, of which 51 co-operative banks are honoured with scheduled status by Reserve Bank of India (RBI). Further the RBI has declared the norms for Financially Sound and Well Managed UCBs (FSWM) on achieving desired parameters i.e. CRAR not less than 10%, Gross NPA of less than 7% and net NPA not more than 3% in capital adequacy, no default in the maintenance of CRR / SLR during the preceding financial year, continuous net profit for preceding three years,

sound internal control systems with at least two professional directors on the Board and regulatory comfort based on, inter-alia, record of compliance with the provisions of Banking Regulation Act, 1949 (AACS), RBI Act, 1934 and the instructions / directions issued by RBI from time to time.

Considering stiff competition in the financial services sector and to remain stable in the market, it is a need of an hour for the co-operative banks to follow the principles of corporate governance.

Corporate Governance

Corporate governance is the system of rules, practices and processes by which an organisation is directed and controlled / managed. Corporate governance fundamentally involves balancing the interests of the many stakeholders in an organisation such as shareholders, board of directors, employees, customers, regulatory authorities, government and last but not least the society. Since corporate governance also provides the framework for attaining an organization’s objectives, it covers practically every globe of management, from action plans and internal controls to performance measurement and corporate disclosure.

Need for corporate governance

The co-operative societies are formed by the likeminded people from the limited demography for catering financial, social and cultural needs of the society and managed by the local personalities by adopting democratic principles. The co-operative banks are part of the co-operative movement. The co-operative banks play pivotal role in catering financial needs of local people and development of the society. The financial institutions are under surveillance of the regulatory authorities and the stakeholders. The major stakeholder in banking sector is depositor. It is the prime responsibility of bankers to protect depositors’ interest.

Need of corporate governance emerged due to following reasons:

Lack of banking knowledge to the board of directors, non availability of the expertise senior management, poor information technology platforms, non availability and non usage of Management Information System (MIS) by the management of banks, Mismanagement of funds by board of directors of some of the co-operative banks by making undue interferences in day to day banking functions such as advances, recovery, investments etc. resulting into deterioration of liquidity position of banks and imposing restrictions by the regulatory authorities to those banks. The approach of regulatory authorities towards all co-operative banks is changed and placed stringent norms on functioning of all co-operative banks and insisted disclosure norms. Due to misbehaviuor of some of the co-operative banks and its closure, the confidence of the society is also shaken and adverse impact was visible on deposits of co-operative banks.

Corporate governance has become global phenomenon and it was studied by King Committee in South Africa, Cadbury Committee in U.K., and Kumarmangalam Birla Committee in India. However the study was carried out in respect of private companies.

Basic Components of corporate governance

The Basel Committee on Banking Supervision (1999) state that from a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their boards of directors and senior management, affecting how banks:

i. Set corporate objectives (including generating economic returns to owners);

ii. Run day-to-day operations of the business;

iii. Consider interest of recognised stakeholders;

a. Align corporate activities and behaviours with the expectation that banks will operate in sound and safe manner, and in compliance with applicable laws and regulations and

iv. Will protect the interest of depositors.

The Committee further specifies basic components of good corporate governance to include:

a) codes of conduct,  the corporate values and other standards of appropriate behaviour and the system used to ensure compliance with them;

b) A well articulated corporate strategy against which the success of the overall enterprise and the contribution of individuals can be measured;

c) The clear assignment of responsibilities and decision making authorities, responsibility/ accountability for execution, incorporating hierarchy of required approvals from individuals to the board of directors;

d) Establishment of mechanisms for the interaction and cooperation among the board of directors, senior management and auditors;

e) Strong internal control systems, which covers strong internal and external audit functions, risk management functions independent of business lines and other checks and balances;

f) Special monitoring of risk exposures where conflict of interests are likely to be particularly great, including business relationships with borrowers affiliated with the bank, large shareholders, senior management or key decisions makers within the firm (e.g. traders);

g) The financial and managerial incentives to act in an appropriate manner, offered to senior management, business line management and employees in the form of  compensation, promotion and other recognition;

h) Appropriate information flows internally and to the public by using appropriate technology and use of management information system (MIS).

On a theoretical perspective corporate governance has been seen as an economic discipline which examines how to achieve an increase in the effectiveness of certain corporation with the help of organizational arrangements, contracts, organizational regulations and business legislation. It is not a disputed fact that banks are vital as well as crucial element to any economy therefore, demands that strong and good corporate governance if positive effects are to be achieved.

Role of the various authorities in corporate governance

A) Regulatory authorities

The co-operative banks are subjected to dual control of RBI and Central Co-operative department in case of multi state co-operative banks and co-operative department of the respective states in case of the co-operative banks other than multi state co-operative banks. There should be cohesiveness between the controlling approaches of these two authorities. On account of mismanagement of board of directors of some of the co-operative banks, these authorities should not impose stringent conditions on all the co-operative banks. The provisions of Co-operative Societies Act and Banking Regulation Act (AACB) should be complimentary to each other. With a view to implement international accounting standards, the responsibility of financial audit of the banks should be given to RBI. It is also necessary to interact with the co-operative banks’ association regarding issues raised by them and to guide them. The control by the co-operative departments should be of qualitative nature instead of acting as fault finding machinery. The role of these authorities should be as friend, guide and philosopher to the banks.

B) Board of Directors

The Board of Directors should accept professionalism in framing various visionary policies, appoint various committees directed by regulatory authorities as well as to observe effective and efficient implementation of the same. The board of directors should update themselves with the latest developments in banking industry, to make changes in policies accordingly, make periodical review with the help of information technology and MIS. It is also necessary to device the strong internal control systems through management audit, system audits, concurrent audit etc. it is duty of the board of directors to observe transparency for knowledge of all the stakeholders by adopting disclosure norms. The Bank working should be supported with the latest Information Technology platform. The Board of directors should form policies for maximum utilization of employees i.e. to take best out of them and also should observe their welfare. Most important aspect to keep in mind that the directors are trustees to protect interest of all the shareholders / stakeholders.

C) Senior Management

The senior management also plays important role in implementing corporate governance. It is the duty of the senior management to implement the policies laid down by the board of directors not only in letters but also in its true spirit. Further, formation of the strong, proactive, efficient and effective teams of the employees who will achieve the goals set by the management. It will be also essential to find out new ways of increasing business of the bank, to update the board of directors about the latest changes in the banking and other industries creating impacts on the business of the bank and also to suggest solutions for the same. The growth of bank is not possible without active support by the employees participation bank’s development programmes.

D) Employee participation

The employees are front end warriors. Each and every employee is “brand ambassador” of the bank. He should discharge his duties efficiently, effectively and diligently. The success of the corporate governance is visible through the work culture displayed by its employees.

Considering current and emerging technological developments in financial sector in days to come, the banking is growing not only by size but also with complexities. Hence utmost need for corporate governance is required. The regulatory authorities are external forces for implementation of corporate governance. However, banks should implement or imbibe corporate governance on its own for realising principle of “survival of the fittest”.