Corporate governance is the system by which companies are directed and controlled. Corporate governance in banks is particularly important as banks are important constituent of economy. The collapse of banks results in monetary loss for the depositors. Thus it is imperative that the interests of depositors be protected. Poor corporate governance in banking can result into bank failures. It can also affect the ability of a bank to properly manage its assets and liabilities. Thus it can result into a liquidity crisis. The ‘Cadbury Committee’ was set up in May 1991 by Financial Reporting Council of London Stock Exchange which recommended various measures to raise standards in Corporate Governance. The Basel Committee on Banking Supervision published guidelines on corporate governance in banks in 1999. The OECD formed its corporate governance principles in 1999 which were again revised in 2004. An advisory group on corporate governance was formed under the chairmanship of Dr. R.H. Patil which submitted its report in March 2001. A Consultative Group was then constituted in November 2001 under the chairmanship of Dr. A.S. Ganguly.
The Organization of Economic Cooperation and Development released its first set of corporate governance principles in 1999. A revised version was then released in 2004. The six OECD principles of corporate governance are:
These six principles can be elaborately read at OECD site.
Given the important financial intermediation role of banks in an economy, their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors’ funds, corporate governance for banking organisations is of great importance to the international financial system and merits targeted supervisory guidance. The Basel Committee on Banking Supervision released guidance Enhancing corporate governance for banking organisations in 2006 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organisations in their countries.
The RBI performs the corporate governance function under the Board for Financial Supervision (BFS). The Reserve Bank had constituted at least three committees/ working groups to assess and make appropriate recommendations. These are:
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