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Banking Regulation

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April 22, 2018

What is the issue?   

  • The recent banking scams have led to considerable outrage, as it involves issues of propriety and governance.
  • It is essential to make the necessary corrections and ensure credibility to the system.

Why is the current situation different?

  • For long, the public sector banks had been a point of concern.
  • The mounting NPAs and governance issues came to light.
  • It led to many calling for privatisation of the PSBs.
  • But the irony at present is that the concern has now shifted to private banks.
  • The banking scams have brought to focus the lack of transparency in the functioning of banks.
  • It has also highlighted the opaqueness of audit and inspection practices.

What are the concerns and remedies?

  • Government - The shortfalls involve the government, central bank, banks and other stakeholders.
  • There is now a blame game on each other.
  • It is essential to revisit systems, laws and practices and update them.
  • The allocation of responsibility for identifying and ensuring remedial action needs to be delineated.
  • Banks - Who is to uphold the moral responsibility in a private bank is undefined.
  • In most cases, it is the CEO, or executive Board members or the non-executive Board members.
  • The issue of conflict of interest with respect to these positions should be addressed.
  • Disclosure of financial dealings of the relatives of them, if any, in the Annual Report or the bank’s web site could be an option.
  • Banks' performance - The central bank or the government have no say in the salary package of a private company.
  • On the other hand, there are no penalties for the government officials' non-performance and their tenures are safe.
  • So, the regulators should fix or approve pay packages of the regulated to hold them responsible.
  • CEO tenure - In PSBs, CEOs have short terms as they get their positions closer to retirement.
  • Whereas, in private banks they begin at an early age and their tenure is always open to debate.
  • Such extended periods lead to creation of power centres.
  • It affects the grooming of second rung leaders.
  • The CEO tenure should be given due attention as it has given rise to controversies in recent times.
  • Regulation - The responsibility of the Boards should be clear on issues of governance.
  • Any deviance from regulation or conflict of interest should be discussed at this level.
  • The presence of a nominee director of the regulator on the Board is essential.
  • S/he is the ‘ear of the public’ and ensures that all compliances are in order.
  • When audit reports are carried out, the lacunae or important findings should be made public, as it influences their decision.
  • This is one way of ensuring that banks become complaint.
  • Review - Any deficiencies in compliance should be reviewed within a specified period of time.
  • It should be highlighted to the public so that it puts pressure on the bank to perform.
  • The overall banking regulatory framework needs strengthening.
  • It should be reviewed every 2 years based on the banks’ response and be revisited periodically.

 

Source: BusinessLine

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