Control Over Organization of Banks – CS Professional Study Material

Chapter 3 Control Over Organization of Banks – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Control Over Organization of Banks – CS Professional Banking Law and Practice Study Material

Question 1.
What are the objectives and guidelines for Corporate Governance in Banking System? (Dec 2017, 10 marks)
Answer:
Banks should have good Corporate Governance which should be much more than complying with legal and regulatory requirements. Good governance facilitates effective management and control of business, enables the Banks to maintain a high level of business ethics and to provide value additions to all their stakeholders.

The Objective of Corporate Governance would cover:

1. To protect and enhance shareholder value.
2. To protect the interest of all other stakeholders such as customers, employees and society at large.
3. To ensure transparency and integrity in communication and to make available full, accurate and clear information to all concerned.
4. To ensure accountability for performance and customer service and to achieve excellence at all levels.

Guidelines for Corporate Governance in Banking System:
The Banks are guided by Reserve Bank Guidelines regarding Corporate Governance issues. Although, there are no specific code, RBI guidelines and the RBI Act inter alia covers various aspect likes, Number of Board of Directors, Minority Shareholders’ Nominee, Voting rights of block shareholders, Dividend declaration, Credit concentration etc. Listed banks are also subject to SEBI Guidelines entitled SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015. Overall, banks are expected to follow a high standard of corporate governance practice.

The Major requirements are briefly pointed out below:
Role of Board of Directors: Meet regularly and to provide effective leadership and insights in business and functional areas. Board should monitor Bank’s performance.

1. Setting up of a framework of strategic control and continuously review the control mechanism.
2. Overseeing the risk profile of the bank.
3. Ensuring expert management and decision making, internal control and reporting requirement.
4. Maximising the interest of stakeholders.

Other Committees of Board:

1. Audit Committee of Board: Functions as per RBI and SEBI guidelines. Induction of more independent directors.
2. Customer Service Committee: Reviews quality of customer service provided by bank.
3. Special committee for monitoring large value frauds: To monitor and review large value frauds with a view to identify systemic issues/risk, if any.
4. IT Strategy Committee: To track the progress of the Bank’s IT initiatives.
5. Remuneration Committee: For evaluating the performance of whole time directors of the bank.
6. Nomination Committee: Carried out ‘fit and proper’ status of candidates filing nominations for election as Directors by shareholder.

Question 2.
What do you mean by Corporate Governance and explain how it plays an important role in banks? (Dec 2020, 6 marks)
Answer:
Corporate Governance (CG) means the system by which Companies are controlled. Corporate Governance in the context of banking denotes, managing the affairs of Banking Company by adopting the global best practices so as to protect the interest of all stakeholders such as depositors, other customers, investors, employees, regulatory authorities and society at large.

Therefore the gamut of Corporate Governance is quite large and encompasses numerous aspects namely regulatory market, stakeholder and internal governance aspects. For a balanced performance of an economy, the country’s economic and financial systems have to be stable. If any of these factors is found wanting there could be destabilization of the economy. Banks are back bone of the economy. Any failure of the governance factors will have its chain reaction on other sectors of the economy.

Therefore banks must follow best governance practices that goes a long way in instilling confidence among all its stake holders. Hence good corporate governance practices are a pre-requisite for a robust banking system in the economy. On the contrary poor governance in the banking system can lead to bank failures and consequently erode the confidence of depositors and other stakeholders leading to run on banks thereby creating negative impact on the financial system both at national as well as international levels.

In light of the aforesaid discussion and for the following reasons Corporate Governance becomes a crucial component for the banking sector:

1. Any financial mishap be detrimental to the economy and to get back to normalcy it would take a long time which may impede growth plans.
2. Banks are highly leveraged and this make them vulnerable to any adverse developments in the economy.
3. Banks are highly trusted organizations that deal with funds of the public at large. Anything missed in their functions will result in loss of trust, leading eventually to the collapse of such institutions and also will have its contagion effect on the economy.
4. Banks act as agents for transmission of the benefits of monetary policies to the public. They also play a vital role in payment and settlement system in an economy. Any weaknesses arising out of poor or inadequate monitoring can be set right with robust internal controls which are an essential part of governance.

Therefor corporate governance in the banks is beneficial both for the banking sector as well as the economy.

Question 3.
When the RBI can remove managerial and other persons from the services of the Bank? (Aug 2021, 6 marks)
Answer:
As a measure of control over management and other persons of a banking company, Section 36AA of the Banking Regulation Act confers powers to RBI, to remove managerial and other persons from office, under certain circumstances.

If the RBI is satisfied that in the public interest or in the overall interest of the banking company as well as to protect the interests of depositors it is necessary to remove a managerial person, it can remove by a written order with effect from any specified date any Chairman, Director, Chief Executive Officer (by whatever name called) or other officer or employee of the banking company. Before removal, such persons who are being removed would be given a reasonable opportunity to make a presentation to RBI, against the said order.

Pending the consideration of the representation from persons facing removal, in the opinion of RBI any delay in the interim would harm the interests of the bank or its depositors, order such persons not to take part either directly or indirectly in the management of, the banking company.

Persons who are facing an order of removal from RBI, within thirty days from the date of communication of the order, can appeal to the Central Government against the order. After considering the appeal, the Central government may take a decision and communicate the same to the concerned persons who have made the appeal and its decision would be final in the matter. The decision of the Central Government cannot be questioned in any Court.

Such persons who are facing removal order from RBI, cease to be whole- time Chairman, Managing Director or Director or any other employees as the case may be of the banking company and cannot directly or indirectly, be concerned with or take part in the management of, any banking company for period not exceeding five years.

On the removal of a person from office under this section, that person shall not be entitled to claim any compensation for the loss or termination of office.

Question 4.
Whether RBI has powers to supersede the Board of directors of a Banking Company? If so, what are the powers and duties of Administrator? (Aug 2021, 6 marks)
Answer:
Under Section 36 ACA of Banking Regulations Act, 1949, Reserve Bank of India (RBI) has powers to supersede the Board of Directors of a Banking Company in certain cases.

If RBI is of the opinion that it is necessary in the interests of a banking company or its depositors and in consultation with Central Government, through a written order, supersede the Board of Directors of such banking company for a period of not exceeding six months (subject to a maximum period of 12 months) or as specified in the order.

Appointment of Administrator
Upon superseding the Board of Directors, the RBI (after due consultation with the Central Government) will appoint, an Administrator (not an officer of the Central Government or a State Government) who has experience in law, finance, banking, economics or accountancy for such period as it determines. The Administrator so appointed, is bound to follow directions issued by the RBI in this regard. Consequent to the supersession of the Board of Directors, the Chairman, Managing Director and other Directors have to vacate their offices. No person shall be entitled to claim any compensation for the loss or termination of his office.

Powers and Duties of Administrator
The Administrator will exercise all powers, discharge functions and perform duties that are applicable under the provisions of the Companies Act or the Banking Regulation Act or any other applicable law in force, until the Board of Directors is reconstituted.

The Administrator appointed shall vacate office immediately after the Board of Directors of such banking company has been reconstituted.

Committee to assist the Administrator
The RBI in consultation with Central government may also appoint a committee of three or more persons who holding meetings. The RBI will specify salary and allowances payable to the Administrator and the members of the committee constituted and the same to be borne by the concerned banking company.

Question 5.
Describe the definition of Adjusted Net Worth (ANW) and Risk Management as per the revised Guidelines issued by the RBI in August, 2020 for Core Investment Companies. (Aug 2021, 6 marks)
Answer:
Adjusted Net Worth (ANW)
While computing Adjusted Net Worth (ANW), the amount representing any direct or indirect capital contribution made by one Core Investment Company (CIC) in another CIC to the extent such amount exceeds ten percent (10%) of Owned Funds of the investing CIC shall be deducted. All other terms and conditions for computation of ANW remain the same.

The deduction requirement shall take immediate effect for any investment made by a CIC in another CIC after date of issue of RBI circular. In cases where the investment by a CIC in another CIC is already in excess of 10 percent as on the date of RBI circular, the CIC need not deduct the excess investment as on the date of RBI circular from owned funds for computation of its ANW till March 31,2023.

Risk Management
The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, shall constitute a Group Risk Management Committee (GRMC). The GRMC shall report to the Board of the CIC that constitutes it and shall meet at least once in a quarter. The composition of GRMC shall be as under:

1. The GRMC shall comprise minimum of five members, including executive members.
2. At least two members shall be independent directors, one of whom shall be the Chairperson of the GRMC.
3. Members shall have adequate and commensurate experience in risk management practices.

The GRMC will have the following responsibilities:

1. Analyse the material risks to which the group, its businesses and subsidiaries are exposed. It must discuss all risk strategies both at an aggregated level and by type of risk and make recommendations to the Board in accordance with the group’s overall risk appetite.
2. Identify potential intra-group conflicts of interest.
3. Assess whether there are effective systems in place to facilitate exchange of information for effective risk oversight of the group.
4. Assess whether the corporate governance framework addresses risk management across the group.
5. Carry out periodic independent formal review of the group structure and internal controls.
6. Articulate the leverage of the Group and monitor the same.

Based on the analyses and recommendations of the GRMC, CICs shall initiate corrective action, where necessary. Chief Risk Officers (CROs), appointed in CICs shall initiate such corrective action.

All CICs with asset size of more than ₹ 5,000 crore shall appoint a CRO with clearly specified roles and responsibilities.
All CICs with asset size of more than ₹ 5,000 crore shall appoint a CRO with clearly specified roles and responsibilities.

CICs shall submit to the Board, a quarterly statement of deviation certified by the Chief Executive Officer /Chief Financial Officer, indicating deviations in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects / purpose stated in the application, sanction letter or offer document for such funding.

Question 6.
What is meaning of differentiated banks? Explain two differentiated banks and their functions in India. (Dec 2021, 7 marks)
Answer:
Differentiated Banks: Differentiated Banks are banking institutions licensed by the Reserve Bank of India to provide specific banking services and products. It is a system of different licenses for different sub components of the banking sector such as Limited Banking License, Commercial Banking License etc. A differentiated license will allow a bank to offer products only in select areas such as Small Finance Banks/Payment Banks and banks concentrating on whole-sale and long-term financing.

Main aim for giving license to differentiated banks is to promote financial inclusion and payments. The term differentiated banks indicate that they are different from the usual universal banks. The universal banks like SBI, Canara Bank etc. can give almost all products and services. On the other hand, the differentiated banks can give only selected products like credit, payments, deposit etc., with RBI regulations.

As on date, the differentiated banks are of two types
(a) Payment Banks and
(b) Small Finance Banks.

(a) Payment Banks: A payments bank is like any other bank, but it operates on a smaller scale without involving any credit risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards. It can accept demand deposits (Increased from ₹ 1 lakhs to ₹ 2 lakhs from 8^th April 2021), offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third-party fund transfers. The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.

(b) Small Finance Banks (SFBs): SFBs can be promoted by resident individuals/ professionals with 10 years of experience in banking and finance as well as companies and societies owned and controlled by residents. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents are also permitted to convert themselves in to SFBs.

Promoter/promoter groups should have a five year successful record of professional experience or of running their businesses are eligible to promote small finance banks. No restriction on operation. At least 50% of loan portfolio should constitute loans up to ₹ 25 lakhs. For Forex business, conditions as applicable to category -2 dealers.

Functions of Payment Banks and Small Finance Banks are as follows:
(1) They help in financial inclusion by provision of savings vehicles.

(2) Supply of credit to small business units; small and marginal farmers; micro and small industries and other unorganized sector entities, through high technology- low cost operations.

(3) Small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.

Question 7.
Answer briefly the following question:
Which Committees of the Bank Boards are constituted with focus on strengthening governance standards in banks? (June 2022, 2 marks)

Question 8.
Read the following case : (Dec 2015)

The liberalisation process initiated by the Government of India during the early 1990s witnessed the entry of several private players in the Indian banking sector. ABC Bank (ABCB) was one of the earliest private sector banks incorporated on 30th October, 2004, in Hyderabad promoted by Joy, Jatin and Chandan. Joy, a development banker, was employed with the Asian Development Bank, Manila; Jatin was Chairman of Vysya Bank for 10 years and Chandan was a former bank executive. Apart from these three promoters, the Global Finance Corporation (GFC) and the Global Bank for Development (GBD) were other major shareholders. ABCB offered an array of products and services in retail, wholesale, corporate, treasury and investment banking for non-resident Indians, apart from depository and advisory services. The bank specialised in lending to software, energy, telecom, textiles, pharmaceuticals and jewellery sectors.

Within three years of operations, the total business exceeded ₹ 43.02 billion, making it one of the fastest growing private sector banks in India. It was also the first among Indian banks to raise Tier-ll capital from multilateral institutions. In five years, ABCB’s deposits were worth ₹ 40 billion, out ofwhich 70% were from retail investors. Its presence in the states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu was significant, with more than 70% of branches in seven major cities and four metros. By July, 2014, the bank had grown to 104 branches in 34 cities, 275 ATMs and 1,400 employees. It had more than a million depositors with deposits worth ₹ 65 billion. The loans disbursed were to the tune of ₹ 35 billion.

Despite all the sound state of affairs, ABCB collapsed in the year 2014¬15 and the collapse resulted on account of many mistakes committed by the bank’s management including lack of financial supervision, weak corporate governance coupled with indulgence of promoters and management in financing collusion with the borrowers. RBI’s probe into ABCB’s accounts revealed a significant erosion of the bank’s net worth and huge number of NPAs. Moreover, ABCB’s attempts to strengthen its capital base through investments from overseas failed due to regulatory problems, resulting in total collapse of the bank.

The major factors that led to the fall of ABCB included disbursement of loans of ₹ 1.4 billion to Carl, a leading stockbroker at the Bombay Stock Exchange (BSE). Carl used the money to purchase ABCB’s shares from the BSE and the National Stock Exchange (NSE). ABCB’s share trading volumes, usually in thousands, shot up during June and July, 2010 to millions. Its share price shot up from ₹ 65 to 1114 between October, 2010 and January, 2011.

The Securities and Exchange Board of India (SEBI) later confirmed that ABCB’s stock price increased because of price manipulation. After the price increase, Carl sold the shares and reaped huge profits. Later, in 2011, investigation reports on the securities scam revealed that Carl had received insider information. In December, 2012, SEBI imposed a ban on the promoters of ABCB, Carl and his associates from dealing in ABCB shares until completion of investigation into the bank’s capital market activities.

RBI charged ABCB with several financial irregularities and lack of transparency in its banking operations. It had not followed SEBI guidelines which capped a bank’s direct exposure to capital markets at five per cent of total advances of the bank. Since 2009, ABCB had given loans worth ₹ 17 billion to many stock brokers against shares as security. When the stock market witnessed a major fall in the aftermath of the securities scam in 2011, loans given by ABCB against the security of shares turned into bad debts, taking a toll on the bank’s financial position.

In late 2010 and early 2011, ABCB gave loans of over ₹ 8 billion to corporate and stock market related entities. For the fiscal 2010-11, ABCB had a total of 55 major corporate NPA accounts; highest NPA accounts in trading (15); broking accounts (11); followed by accounts in food processing, textiles and petrochemicals. Other NPA accounts were from distillery, agriculture, gems and jewellery and media companies. In the last quarter of fiscal 2010-11, ABCB reported a fall of 164% in profit after tax (PAT) because of ₹ 900 million provisioning for NPAs.

ABCB’s exposure to the capital market in the fiscal ending 2010-11 was around 24% of total advances; which came down to 14% by March, 2012 and around 5% for the fiscal ending March, 2013. Though the exposure to capital markets had been brought down gradually by ABCB, the damage had already been done as most advances turned into NPAs due to the downtrend of the stock market after the securities scam. ABCB had to write off ₹ 2.52 billion towards NPAs for the financial year 2011-12.

After securing RBI approval to utilise reserves of ₹ 2.0195 billion. Still, there was under provisioning in the books. Much of ABCB’s NPAs were due to the loans given to Carl of 12.8 billion, a telecom company linked to Carl of 12.5 billion and a media company of ₹ 2.5 billion. As on 31st March, 2013. ABCB reported gross NPAs of ₹ 9.158 billion while total provisioning for the period was at ₹ 2.68 billion and the bank’s net NPAs for the period stood at 19.7% of its advances.

RBI’s annual financial inspection (AFI) showed that the networth had been further eroded and capital adequacy ratio (CAR) had also turned negative. For the financial year 2012-13, ABCB recorded loss of ₹ 2.720 billion with gross NPAs at ₹ 9.17 billion, accounting for 28% of the bank’s total advances. High NPAs were a primary reason for ABCB’s poor performance as it had lent indiscriminately to stockbrokers, diamond traders and exporters, without following RBI norms.

In the wake of these financial irregularities, RBI placed ABCB under monthly monitoring and its operations relating to advances, premature withdrawal of deposits, declaration of dividend and capital market exposure were restricted. The statutory auditors of the bank were also asked to be changed.

The central bank further advised ABCB to infuse fresh capital to prevent the networth from remaining negative and restore its CAR to a minimum of nine per cent. The bank was advised to explore all possible options for infusion of capital through domestic sources or through merger with another bank.

All these factors resulted in the imposition of moratorium by RBI and on 24^th July, 2014, the Government of India imposed a moratorium on the bank on the grounds of ‘wrong financial disclosures’. The moratorium was for three months from close of business on 24^th July, 2014 till 23^rd October, 2014.

RBI said that the moratorium was imposed in public interest and to protect the interests of depositors. All operations of ABCB were frozen and it was ordered not to give loans without RBI permission. It was allowed only to make payments for day-to-day operations or for meeting obligations entered into before the order.

On 26^th July, 2014, RBI announced that ABCB would be merged with the Northern Bank of Commerce (NBC). As per the scheme, NBC took over all the assets and liabilities of ABCB on its books. It acquired all 104 branches of ABCB, 275 ATMs, a workforce of 1,400 employees and one million customers at an estimated merger cost of ₹ 8 billion.

NBC’s total business volume was expected to reach ₹ 65 billion and the total branch network to cross 1,100. All corporate accounts including salary accounts were transferred to NBC. The entire amount of paid-up equity capital of ABCB was adjusted towards its liabilities. There was no share swap between ABCB and NBC, which meant that ABCB’s shareholders were the ultimate losers, as they did not get any shares of NBC.

Though the interests of ABCB’s depositors were protected, its shareholders lost their total investments in the bank overnight.

ABCB’s collapse raised doubts on the credibility of private sector banks in India. Before ABCB, two other private sector banks, namely, Bank of XYZ and the EFG Bank had collapsed in 2010 and 2012 respectively. Analysts said that ABCB’s customers should have been more aware about protecting their interests as the bank catered primarily to educated, city-based customers who were expected to be more knowledgeable and prudent.

When ABCB’s weak financial position was made public, they should have understood that their deposits in the bank were unsafe. However, they seemed to have been carried away by the bank’s higher rate of interest. The entire issue served as a lesson for small investors to exercise more diligence while choosing a private sector bank.

In the backdrop of this case, answer the following questions :
(a) Describe the basis on which RBI would have granted licence to ABCB to set-up the bank. How far ABCB has not been able to comply with these requirements ? (10 marks)
(b) Analyse the reasons that led to the fall of ABCB, duly supported by facts and specific data. (10 marks)
(c) State the norms for exposure to capital market as enumerated by RBI. How far has ABCB followed such norms? (10 marks)
(d) Examine the role of RBI and SEBI as regulating authorities in the collapse of ABCB. Also give your suggestions to ensure non-recurrence of such debacle. (20 marks)
Answer:
(a) ABC Bank was incorporated in Hyderabad on 30^th October, 2004, of which main promoters worked for several years in the banking industry on very high responsible positions, with the sound financial stake made by GFC and GBD. The bank after its incorporation carried out a wide range of activities. Apart from depository and advisory services, it was involved in provision of services in retail, wholesale, corporate etc., and treasury and investment banking for non-resident Indians.

A banking company has to comply with various parameters as specified u/s 22 of the RBI Act in order to get the license to set-up and operate a bank in the country. RBI examines the following aspects prior to grant of a license:

1. Whether the company is or will be able to pay its present and future depositors in full as and when their claims accrue?
2. Whether the affairs of the company are being conducted or likely to be conducted in a manner detrimental to the interests of its present and future depositors?
3. Whether the company has an adequate capital structure and earning prospects?
4. Whether public interest will be served by grant of license to the company?
5. Other issues relating to branch expansion, unbanked area and other aspect.

The promoters of ABC Bank fulfilled all these criteria by having adequate capital base participated by the promoters and by GFC and GBD which ensured the protection of interest of the depositors. The Bank also raised Tier-ll capital from multilateral institutions. ABC Bank complied with the license requirements, RBI has not committed any mistake while granting the license to ABC Bank to operate.

(b) ABC Bank after its incorporation in 2004 was working smoothly and in the correct directions and well planned manner till the advances given by it in collusion with the Promoters or other top Management Persons caused huge NPA and ate away the investment made by the stake holders. The main reason of its collapse was lack of corporate governance and transparency in its affairs.

There was lack of corporate governance and involvement of promoters in giving finance to Carl. He was a stock broker who used the money for trading in the shares of the bank by having insider information and making good profits by dealing in bank’s shares. The reason for his making huge profit was the insider information available to him. As a result, SEBI imposed a ban on Carl as well as on the promoters of the ABC Bank and their associates to not to deal in shares of the bank till the completion of the investigation of the capital market activities of the bank.

Further the bank was charged with several financial irregularities and lack of transparency in its banking operations by the RBI. The ABC Bank did not follow SEBI guidelines limiting a bank’s direct exposure to capital markets to five per cent. The bank had provided huge advances to many stock brokers against the security of shares and most of these turned out to be NPAs after the market followed a downtrend.

Out of total NPAs, much of were owing to the loans given to Carl, these were to the extent of ₹ 2.8 billion given to Carl, ₹ 2.5 billion each given to a telecom company and a media company having link with Carl. The high level of NPA of the bank (191.7% of the total advances) resulted into the collapse of bank in which share holders lost their entire investment. Due to regulatory problems, ABC Bank also failed in strengthening its capital base through overseas investments.

(c) Limits on Banks’ Exposure to Capital Markets as enumerated by RBI:
1. Statutory limit on shareholding in companies: No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less, except as provided in sub-section (1) of Section 19 of the Banking Regulation Act, 1949. Shares held in demat form should also be included for the purpose of determining the exposure limit.

2. Regulatory Limit:

1. A Solo Basis: The aggregate exposure of a bank to the capital markets in all forms (both fund based and non-fund based) should not exceed 40% of its net worth as on March 31 of the previous year.
2. Consolidated Basis: The aggregate exposure of a consolidated bank to capital markets (both fund based and non-fund based) should not exceed 40% of its consolidated net worth as on March 31 of the previous year.

If the bank does not observe above guidelines and keep giving finances to the particular sectors, indiscrimination of the guidelines such as financing to the capital market, gems and jewellery, petro chemicals and telecom/media companies beyond the limits prescribed may result into over exposure to these sectors. ABC Bank had also made exposure to stock broker Carl, a leading stock broker of the Bombay Stock Exchange, to the extent of ₹ 1.4 billion.

The advance taken by Carl was used in share trading of the bank’s shares and turnover of which was inflated from thousands to millions in a short span and the share prices of the bank almost doubled in a period of 2 months. The entire shares held by Carl and the promoters were off-loaded causing a steep fall in the value of bank’s shares causing damage and loss to the shareholders/investors.

The fall in the share prices of the bank resulted into loss of advance of ₹ 1.4 billion given to Carl as well as of the advances given to his associates and linked persons. The bank besides the advance to Carl had also made exposure to other stock brokers against the shares as security to the extent of ₹ 17 billion. Most of these advances turned out to be bad advances because of security scam in 2011 adversely impacting the financial position of the bank. Had the bank not made such heavy and over exposure to the stock brokers in the capital market then it would have not collapsed because such advances turned out as bad advances. Therefore, it can be concluded that the over exposure to the capital market resulted into huge loss to ABC Bank.

(d) Reserve Bank of India formulates, monitors and implements India’s monetary policy. Main functions of the RBI in this regard in accordance with the provisions of the RBI Act, 1934 are:

1. operating monetary policy with the aim of maintaining economic and financial stability and ensuring adequate financial resources for development purposes;
2. meeting the currency requirement of the public;
3. promotion of an efficient financial system;
4. foreign exchange reserve management;
5. conduct of banking and financial operations of the government.

Since the onset of the process of economic reforms, including the on-going liberalization and globalization of the economy, the role of the RBI as the Regulator of the financial sector has grown and diversified. The entire institutional function of providing finance comes under the regulatory oversight of the RBI.

In case of ABC Bank, RBI was derelict in its handling given that the RBI had detected that ABC Bank had a negative net worth as long back as March 2012. Instead of taking any serious action, it had simply removed the bank’s auditors. The imposition of moratorium on ABC Bank seems to be a belated action on the part of the regulator. The bank’s customers, particularly depositors, would have expected Reserve Bank of India to have warned them beforehand that they were banking with a shaky bank. The shareholders, particularly those holding nominal shares, would feel that they had been let down.

The Functions of SEBI are:

• to protect the interests of investors in securities and to promote the development of, and to regulate the securities market;
• regulating the business in stock exchanges and any other securities markets;
• registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers;
• prohibiting fraudulent and unfair trade practices relating to securities markets;
• prohibiting insider trading in securities;
• regulating substantial acquisition of shares and takeover of companies;

The primary objective of SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. Investors are the backbone of the securities market. As a part of investor’s protection, SEBI is to take necessary steps to prohibit insider trading by checking and curbing unhealthy and manipulative practices by persons who have more access than others to the information about the company. In case of ABC Bank SEBI could have taken action against it for price manipulation since Carl received insider information.

However if the situation is analysed objectively, it has to be understood that based on the recent developments in the banking system, particularly the events affecting the functioning of private sector banks, the RBI has placed in the public domain the draft policy framework for ownership and governance in private sector banks in order to strengthen the functioning of private sector banks.

The public in general and those closely associated with the financial system and well- wishers of the banking system may want implementation of the guidelines quickly. It may be necessary to tighten the policy guidelines on ownership and governance in private sector banks in course of time to avert recurrence of such incidents as has happened in case of ABC Bank because of lack of governance and delayed actions of RBI. RBI and SEBI should keep vigil mechanism and try to ensure that small investors act carefully while banking with a private sector bank.

Question 9.
What are the Principal of Corporate Social Responsibility?
Answer:
Corporate Social Responsibility in the Financial Sector
The institutions representing the financial sector like banks, mutual funds and other institutions, like other corporate sector players contribute significantly to the community development in many ways. International Financial Corporation (IFC) an affiliate of the World Bank, International Chamber of Commerce (ICC) and United Nations Organization (UNO) are participating in the various projects across the world.

They are motivating banks and financial institutions to play an effective role in promoting environmental protection and social sustainability through these projects. In this respect, the financial institutions and banks are encouraged to follow certain principles in respect of CSR

(a) Commitment to sustainability: FIs should expand their mission of profit maximization to a vision of social and environmental sustainability. To achieve this FIs should integrate the consideration of ecological limits, social equity and economic justice into their corporate strategies and into their core business models.

(b) Commitment to ‘Do No Harm’: FIs should prevent or minimize harm to the environment
(c) Commitment to Responsibility: FIs should take full responsibility for the environmental and social impacts of their transaction
(d) Commitment to Transparency: FIs should have transparency in their policies and business dealings
(e) Commitment to Accountability: FIs should be accountable to their stakeholders and the community where they operate. FIs should promote economic development through their CSR activities
(f) Commitment to good governance: FIs should frame good corporate governance policies and follow them in letter and spirit.

Question 10.
What are the important features of Corporate Governance practices in banking sector?
Answer:
Corporate Governance in Banking System
Banks play an important role in the economic development of a nation. As intermediaries in the Financial Sector, banks also act as trustees of the funds of the depositors. As such for efficient functioning of banks an effective Corporate Governance practices should be an integral part of bank management.

Banks should have good Corporate Governance which should be much more than complying with legal and regulatory requirements. Good governance facilitates effective management and control of business, enables the Banks to maintain a high level of business ethics and to provide value additions to all their stakeholders.

The objectives of corporate governance would cover:

1. To protect and enhance shareholder value
2. To protect the interest of all other stakeholders such as customers, employees and society at large
3. To ensure transparency and integrity in communication and to make available full, accurate and clear information to all concerned
4. To ensure accountability for performance and customer service and to achieve excellence at all levels

Role of the Board of Directors

1. The Bank’s Board of Directors should meet regularly and to provide effective leadership and insights in business and functional areas. They also should monitor Bank’s performance.
2. Setting up of a framework of strategic control and continuously reviewing its efficacy.
3. Implementation, review and monitoring the integrity of its business and control mechanisms
4. Overseeing the risk profile of the Bank.
5. Ensuring expert management and decision-making, internal control and reporting requirements.
6. Maximizing the interests of its stakeholders.

Role of Chairman and/ or CEO
The Chairman and/or CEO have the responsibility for all aspects of executive management and are accountable to the Board for the ultimate performance of the Bank and implementation of the policies laid down by the Board.

Question 11.
Write short note on Auditor’s certificate on Corporate Governance.
Answer:
Auditors’ Certificate on Corporate Governance:
This certificate issued by Chartered Accountant, is to be furnished along with the Annual Report of the Bank. The certificate indicates the examination by the chartered accountant regarding compliance of conditions of Corporate Governance by the Bank for the financial year ending. This certificate is based on the SEBI (LODR) Regulations, 2015 of the bank with Stock Exchanges in India.

The compliance of the conditions of Corporate Governance is the responsibility of the Management. The auditor’s examination is being carried out in accordance with the Guidance Note on Certification of Corporate Governance, issued by the Institute of Chartered Accountants of India. It is regarding the compliance of corporate governance procedures and implementation thereof, adopted by the bank.