Corporate Governance and Regulatory Issues in Indian Banking

7/23/2019 Corporate Governance and Regulatory Issues in Indian Banking

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C O

N T E N T S

• Introduction

• Three lines of defence

• Principle 1: Board’s overallresponsibilities

• Principle 2: Board qualicationsand composition

• Principle 3: Board’s ownstructure and practice

• Principle : Senior

management

• Principle !: Governance ofgroup structures

• Principle ": Risk managementfunction

• Principle #: Risk idemonitoring and

• Principle $: Risk co

• Principle %: !ompl

• Principle 1: Intern• Principle 11: !omp

• Principle 12: #isclotransparenc$

•

Principle 13: The rsupervisors

• Regulator$ Issues iBanking S$stem

• References









T-REE .INES O/ 'E/ENCE

• The increased focus on risk and the supportingframework includes identif$ing the responsibilities of d

of the organi.ation often referred to as the 7t,ree lines

4% The business line 9 the rst line of defence 9 hasof risk whereb$ it acknowledges and manages thincurs in conducting its activities%

2% The risk management function is responsibleidentif$ing measuring monitoring and reportinenterprise/wide basis as part of the second line of

:% The internal audit function is charged with thedefence conducting risk/based and general auditsto provide assurance to the board%





Cont)*

Corporate culture and values

•

" fundamental component of good governance is culture of reinforcing appropriate norms for respethical behavior% These norms are especiall$ critical bank’s risk awareness risk/taking behavior and risk &i%e% the bank’s 7risk culture8'%

•

" bank’s code of conduct or code of ethics or compashould dene acceptable and unacceptable behavior

• The bank’s corporate values should recogni.e importance of timel$ and frank discussion and eproblems to higher levels within the organi.ation%





Cont)*

#versi!ht of senior ana!eent

• The board should select the !(- and ma$ sele

personnel including members of senior managemen

• The board should provide oversight of senior ma

should hold members of senior management acctheir actions and enumerate the possible conseque

actions are not aligned with the board’s

e;pectations%



Principle 2: 0oar) 9ualications an) co5

• 0oar) 5e5ers s,oul) e an) re5ain 9ualie)4 in)collectively4 +or t,eir positions8

• T,ey s,oul) un)erstan) t,eir oversig,t an) corporate govere ale to e;ercise soun)4 o6ective 6u)g5ent aout t,e a<ai

&oard coposition

• The board must be suitable to carr$ out its responsibilitiecomposition that facilitates e)ective oversight% =or that purp

should be comprised of a su1cient number of independent di• The board should be comprised of individuals with a ba

diversit$ and e;pertise who collectivel$ possess tqualications commensurate with the si.e comple;it$ and risbank%





Principle 3: 0oar)s o7n structure an) p

T,e oar) s,oul) )ene appropriate governance structures+or its o7n 7or4 an) put in place t,e 5eans +or suc, p

+ollo7e) an) perio)ically revie7e) +or ongoing e<ectiveness8#r!ani)ation and assessent of the board

• The board should structure itself in terms of leadership si.of committees so as to e)ectivel$ carr$ out its oversight responsibilities%

• The board should maintain and periodicall$ update organb$/laws or other similar documents setting out its organresponsibilities and ke$ activities%

• To support its own performance the board should carassessments alone or with the assistance of e;ternal e;per

as a whole%



Cont)*

Role of the chair

• The chair provides leadership to the board and is reits e)ective overall functioning including marelationship of trust with board members%

• The chair should encourage and promote critical diensure that dissenting views can be freel$ e;

discussed within the decision/making process%• To promote checks and balances the chair of the boa

an independent or non/e;ecutive board member%









Cont)*

Copensation coittees

•

The compensation committee is required for s$stemicbanks%

• It should support the board in

overseeing the remuneration s$stem’s design and operat

ensuring that remuneration is appropriate and consis

bank’s culture long/term business and risk appetite pe

control environment as well as with an$ legal

requirements%



Cont)*

Con+icts of interest

• !on5icts of interest ma$ arise as a result of the various activ

of the bank or between the interests of the bank or its those of the bank’s board members or senior managers%

• !on5icts of interest ma$ also arise when a bank is part of a b

• The board should oversee the implementation and operatioidentif$ potential con5icts of interest%

• The board should have a formal written con5icts/of/interestob+ective compliance process for implementing the polic$%

• The board should oversee and be satised with the proappropriate public disclosure is made and@or information supervisors%



Principle : Senior 5anage5ent

(n)er t,e )irection an) oversig,t o+ t,e oar)4 seniors,oul) carry out an) 5anage t,e ans activities in a 5an

7it, t,e usiness strategy4 ris appetite4 re5uneration an)approve) y t,e oar)8

• Senior management consists of a core group of individuaand accountable to the board for the sound and prudemanagement of the bank%

• The organi.ation and procedures and decision/makimanagement should be clear and transparent and designe)ective management of the bank%

• Aembers of senior management should have the necessacompetencies and integrit$ to manage the businesses and

their supervision%



Cont)*• Aembers of senior management should be selected through

promotion or recruitment process which takes into account th

required for the position in question%• Senior management contributes substantiall$ to a bank’s so

governance through personal conduct% The$ should prooversight of those the$ manage and ensure that the bank’consistent with the business strateg$ risk appetite and the pob$ the board%

• Senior management is responsible for delegating duties to sestablish a management structure that promotes accountabilit$ athroughout the bank%

• Senior management should provide the board with the informacarr$ out its responsibilities supervise senior management

qualit$ of senior management’s performance%

Principle !: Governance o+ grou



Principle !: Governance o+ groustructures• In a group structure4 t,e oar) o+ t,e parent co5pany ,

responsiility +or t,e group an) +or ensuring t,e estalis,5ent a

a clear governance +ra5e7or appropriate to t,e structure4 uo+ t,e group an) its entities8

• T,e oar) an) senior 5anage5ent s,oul) no7 an) un)ersgroups organi=ational structure an) t,e riss t,at it poses8

arent copan- boards

• In operating within a group structure the board of the parent cbe aware of the material risks and issues that might a)ect botwhole and its subsidiaries%

• It should e;ercise adequate oversight over subsidiaries whileindependent legal and governance responsibilities that m

subsidiar$ boards%



Cont)*• In order to full its responsibilities the board of the pa

should<

establish a group structure and a corporate governanwith clearl$ dened roles and responsibilities%

dene an appropriate subsidiar$ board and managem

assess whether the group’s corporate governanincludes adequate policies processes and controls%

ensure that the group’s corporate governance frameappropriate processes and controls to identif$ and adintragroup con5icts of interest%

approve policies and clear strategies for establishing and legal entities and ensure that the$ are consipolicies and interests of the group%











C t)



Cont)* in5uencing and when necessar$ challenging decisions th

material risk%

reporting to senior management and the board or risk commititems including but not limited to proposing appropriateactions%

• 0hile it is common for risk managers to work closel$ with indunits the risk management function should be su1cientl$ indebusiness units and should not be involved in revenue generation%

• The risk management function should have a su1cient numbewho possess the requisite e;perience and qualications includproduct knowledge as well as command of risk disciplines%

• Sta) should have the abilit$ and willingness to e)ectivel$ chaoperations regarding all aspects of risk arising from the bank’s ac

• Sta) should have access to regular training%







Principle #: Ris i)entication4 5onito



Principle #: Ris i)entication4 5onitocontrolling• Riss s,oul) e i)entie)4 5onitore) an) controlle) on an

7i)e an) in)ivi)ual entity asis8

•

T,e ans ris 5anage5ent an) internal control in+rastructu pace 7it, c,anges to t,e ans ris prole4 e;ternal ris in)ustry practice8

• The bank’s risk governance framework should include policiesappropriate control procedures and processes%

• Risk identication should encompass all material risks to theo)/balance sheet and on a group/wide portfolio/wise and busi

• Risk identication and measurement should include both qqualitative elements%

• Banks should also consider and evaluate harder/to/quantif$reputation risk%



Principle $: Ris co55unication



Principle $: Ris co55unicationBn e<ective ris governance +ra5e7or re9uires roust c7it,in t,e an aout ris4 ot, across t,e organi=ationreporting to t,e oar) an) senior 5anage5ent8

• Information should be communicated to the boardmanagement in a timel$ accurate and understandable mthe$ are equipped to take informed decisions%

• Aaterial risk/related ad hoc information that requires immeor reactions should be promptl$ presented to senior manag

appropriate the board responsible o1cers heads of contro

• Risk reporting s$stems should be d$namic comprehensiveand should draw on a range of underl$ing assumptions%

• Banks should avoid organi.ational 7silos8 that can impsharing of information%

Principle %: Co5pliance



Principle %: Co5pliance• T,e ans oar) o+ )irectors is responsile +or ov

5anage5ent o+ t,e ans co5pliance ris8

• T,e oar) s,oul) estalis, a co5pliance +unction an)ans policies an) processes +or i)enti+ying4 assessinan) reporting an) a)vising on co5pliance ris8

• The bank’s senior management is responsible for ecompliance polic$ that contains the basic principles to

b$ the board and e;plains the main compliance proceall levels of the organi.ation%

• The compliance function should advise the boardmanagement on the bank’s compliance with applicaband standards and keep them informed of development



Principle 1: Internal Bu)it



Principle 1: Internal Bu)it T,e internal au)it +unction s,oul) provi)e in)epen)ent assoar) an) support oar) an) senior 5anage5ent in

e<ective governance process an) t,e longAter5 soun)ness

• The internal audit function should have a clear mandate bto the board and be independent of the audited activities%

• It should have su1cient standing skills resources and athe bank to enable the auditors to carr$ out their assignmeand ob+ectivel$%

• There should be no 7dual hatting8 b$ the heads of these fu





Cont)



Cont)*

• =or emplo$ees in control functions &eg< risk compliance

audit' remuneration should be determined independbusiness line overseen and performance measures shoprincipall$ on the achievement of their own ob+ectives%

• The remuneration structure should be in line with the risk strateg$ ob+ectives values and long/term interests o

• Remuneration should re5ect risk/taking and risk outcome

• Banks have to set specic provisions for emplo$ees witin5uence on the overall risk prole so/called material ris



Principle 13: T,e role o+ supervi



Principle 13: T,e role o+ supervi• Supervisors s,oul) provi)e gui)ance +or an) supervise corporate

ans t,roug, co5pre,ensive evaluations an) regular interactan) senior 5anage5ent8

• T,ey s,oul) s,are in+or5ation on corporate governance 7it, ot,

• The board and senior management are primaril$ responsible for of the bank and supervisors should assess their performance in

• Supervisors should have processes in place to full$ evaluate a bgovernance through

regular reviews of written materials and reports interviews with board members and bank personnel

e;aminations

self/assessments b$ the bank

other t$pes of on/ and o)/site monitoring



Cont)



Cont)*• Supervisors should interact regularl$ with boards

individual board members senior managers and thos

for the risk management compliance and internal aud• The$ should provide insights to the bank on its opera

to its peers market developments and emerging risks%

• The frequenc$ of interactions with the above persoaccording to the si.e comple;it$ structure economi

and risk prole of the bank%• =or s$stemicall$ important banks interaction should

frequentl$ particularl$ with members of the board andsenior management and those responsible fomanagement compliance and internal audit functions%









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Corporate Governance and Regulatory Issues in Indian Banking

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