CALP: How to make bank boards more effective?

03 February 2015

Topics

•Criticality of effective board in banks – why banks are different

•Making bank boards effective – key levers

•Some reflections on the Nayak Committee

•Breakout group discussion

Key themes for Public Sector reinvigoration (MoF Presentation – 07 January)

•Autonomy with governance

•Efficiency

•Innovation and inclusion

•Ownership, capital, & consolidation

•Upgradation of HR

Bank governance globally, post the financial crisis

•Comprehensive regulatory review of banks and FI governance

•Competence and capabilities in addition to “fit and proper”

•Board functioning

- Significantly more time

- Overview of operations

- Direct engagement with operating managers, unmediated by the CEO

- Deeper committee deliberations

Indian economy is highly bank centric

Note: Excludes Claims on govt.; total household savings data not available for ’91-’03, only split ratios available Source: RBI

Why (Indian) banks are different?

•Only platform to capitalise economy - over 60% of financial savings mobilised through banking

•Leverage & risk

•Connectedness – contagion, systemic stability

•Govt ownership – capitalisation – fiscal burden

Making boards effective

•Structure – Conduct – Performance

•Structure:

- Composition – independent, background and experience, etc

- Tenure

- Roles (Committees, etc)

- Separation of C & MD

•Conduct

- Agenda & Forum (Full board vs committees)

- Information

- Decisions

- Follow up

How to improve Board conduct?

•Agenda: getting the right issues

- 7 critical themes – business strategy, risk management, financial (regulatory) reporting, compliance, customer protection, financial inclusion, and HR

- Policy versus operational

- For decision vs information

- Committees vs full Board

•Information: Timely and accurate

- “Marked- to-model” MIS

- Relevant to the issue

Nayak committee

•Mandate: Comprehensive review of the functioning of bank boards and other associated issues (ownership, regulations, compensation, etc)

•Comprehensively covered issues of structure and conduct

•41 recommendations spanning 6 topic areas; covered both public and private (new and old) bank boards

- Roughly a third each to be acted on by the government, the RBI, and the board themselves

- Includes institutional changes such as creation of the BBB and the BIC

- 14 step process to create fully empowered boards in PSU banks

- Legislative changes and draft legislation