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The group recommended creating a pool of professional and talented people for board-level appointments in banks

MUMBAI, April 5

THE Reserve Bank of India's consultative group has recommended that appropriate due diligence procedures be established for appointment of directors on the boards of private sector banks.

In the case of private sector banks "where promoter directors may act in concert, the independent/non-executive directors should provide effective checks and balances ensuring that the bank does not build up exposures to entities connected with the promoters or their associates,'' the group said.

The RBI had set up the consultative group, headed by Dr A.S. Ganguly, Director, Central Board of RBI, to make the functioning of bank boards more effective. The proposal was mooted in the busy season credit policy last year in the light of trouble at some banks such as the Global Trust Bank and Benares State Bank

The RBI Governor, Dr Bimal Jalan, had told Business Line after the presentation of the Credit Policy in October last that the idea was to make boards more effective to ensure that managements did not go overboard.

"This is so that we don't get into a situation where for a certain prolonged period, of, say, four or five months, decisions have been taken and the board has not been informed or the bank does not adhere to guidelines laid down by the board or a nexus is emerging between two entities,'' Dr Jalan had said without mentioning any bank by name.

Among other recommendations, the group said, the Government, while nominating directors on the boards of public sector banks should be guided by certain broad "fit and proper'' norms for directors. The criteria suggested by Bank for International Settlements (BIS) may be suitably adopted, the group said. It was suggested that in large public sector banks, the office of chairman and managing director be separated.

It further recommended creating a pool of professional and talented people for board-level appointments in banks and that the RBI should maintain the data for the purpose. It, however, said the current level of remuneration for directors was grossly inadequate to attract qualified professional people.

As a step towards effective corporate governance, it would be "desirable to take an undertaking from every director to the effect that they have gone through the guidelines defining their role and responsibilities and understood what is expected of them and enter into a covenant to discharge their responsibilities to the best of their abilities, individually and collectively'', the group said.

The group said banks could be asked to come up with a strategy for implementation of the governance standards recommended. Once the strategy is received from all banks, a periodical review of the progress of its implementation could be undertaken. Dr Jalan had then said that "essentially, the idea is to get a feedback on what should be done to make boards a more effective mechanism for ensuring managements do not step out of line...some of the things which are talked about in corporate governance terms.''

The group suggested that there could be a "supervisory committee'' of the board in all banks, private or public, which will work on collective trust and at the same time without diluting the overall responsibility of the board. Another suggestion of the group was that nomination committees of boards be set up to recommend appointment of independent non-executive directors.

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