Wednesday, May 14, 2014

Governance in banks

The first two paragraphs in the report of the committee to review governance of bank boards in India excellently capture the state of governance today.

"1. The financial position of public sector banks is fragile, partly masked by regulatory forbearance. Forbearance delays, but does not extinguish, the recognition of this fragility. Capital is significantly eroded with the proportion of stressed assets rising rapidly. The Report projects, under different scenarios, the capital requirements till March 2018 in order that provisions are prudent, there is adequate balance sheet growth to support the needs of the economy, and capital is in line with the more demanding requirements of Basel 3.

2. It is unclear that the boards of most of these banks have the required sense of purpose, in terms of their focus on business strategy and risk management, in being able to provide oversight to steer the banks through their present difficult position. The boards are disempowered, and the selection process for directors is increasingly compromised. Board governance is consequently weak."

Need we say more?

P.Chidambaram had insisted that public sector banks declare interim dividends before the end of March, 2014 in order to keep fiscal deficit at lower levels. Punjab National Bank declared 100% interim dividend. When the  audited financials were announced yesterday, it was clarified that the bank's performance did not permit any more dividend. What if the financials had suffered a little more and consequently even the interim paid was not justified?

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