Banking Regulation

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