The Consultative Group of Directors of banks and financial institutions was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure.

The Group has produced a list of recommendations after a comprehensive review of the existing legal framework governing constitution of the Boards of banks and financial institutions, interaction with various interested groups, organisations, etc. and benchmarked its recommendations with international best practices as enunciated by the Basel Committee on Banking Supervision, as well as of other committees and advisory bodies, to the extent applicable in the Indian environment.

Due diligence of the directors of all banks - be they in public or private sector, should be done in regard to their suitability for the post by way of qualifications and technical expertise. Involvement of Nomination Committee of the Board in such an exercise should be seriously considered as a formal process.

The Government while nominating directors on the Boards of public sector banks should be guided by certain broad "fit and proper" norms for the Directors. The criteria suggested by the BIS may be suitably adopted for considering 'fit and proper" test for bank directors.

For assessing integrity and suitability, factors such as criminal records, financial position, civil actions undertaken to pursue personal debts, refusal of admission to, or expulsion from professional bodies, sanctions applied by regulators or similar bodies, and previous questionable business practices, etc. should be considered.

6. The appointment / nomination of independent / non-executive directors to the Boards of banks (both public sector and private sector) should be from a pool of professional and talented people to be prepared and maintained by Reserve Bank of India. Any deviation from this procedure by any bank should be with the prior approval of RBI.

In the present context of banking becoming more complex and knowledge-based, there is an urgent need for making the Boards of banks more contemporarily professional by inducting technical and specially qualified individuals.

While continuing regulation based representation of sectors like agriculture, SSI, cooperation, etc, efforts should be aimed at combining it with the need-based representation of skills such as marketing, technology & systems, risk management, strategic planning, treasury operations, credit recovery, etc., Further, the Boards of banks should also have representation in the areas such as finance, information technology, human resources development, economics and persons with good track record of experience in managing / advising industrial enterprises.

The independent / non-executive directors should raise in the meetings of the Board, critical questions relating to business strategy, including loans & recovery policy, housekeeping and internal control systems, record of exposure to various sectors / industries by way of both credit and investment, risk management systems, internal audit, accounting policy, senior management development, other important aspects of the functioning of the bank and investor relations. The good corporate governance in banks will be sustained by a knowledgeable, skillful and well informed Board of Directors with a proper blend of expertise / professionalism, independence and involvement.

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 independent / non-executive directors should provide effective checks and balances particularly, in widely held and closely controlled baking organisations.

Directors on the boards of NBFCs may be permitted to become Independent / non-executive directors on the boards of banks, subject to certain conditions.

Every Director should be given a brief on the functioning of the bank, before his appointment / induction, covering various aspects of structure / functioning of the bank.

The Board should formulate policies relating to credit dispensation, particularly in regard to exposure to various productive sectors, geographical areas, investments, exposures to sensitive sectors such as capital market, strategies for recovery of loans and status of progress with respect to investments, risk management, etc.

The directors could be made more responsible to their organisation by exposing them to need-based training programmes / seminars / workshops to acquaint them with emerging developments / challenges facing the banking sector. Reserve Bank as the Regulator, could take the initiative to organizing such seminars.

The whole-time directors should have sufficiently long tenure to enable them to leave a mark of their leadership and business acumen on the bank's performance.

Reserve Bank may bring out an updated charter indicating clear-cut, specific guidelines on the role expected and the responsibilities of the individual directors.

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 the role and responsibilities of directors, 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 existing level of remuneration paid (by way of sitting fees, etc.) to directors of banks and financial institutions is grossly inadequate, by contemporary standards, to attract qualified professional people to their boards, and expect them to discharge their duties as per the mutually agreed covenants. In order to attract quality professionals, the level of remuneration payable to the directors should be commensurate with the time required to be devoted to the bank's work as well as to signal the appropriateness of remuneration to the quality of inputs expected from a member. The remuneration of the directors may also include the form of stock option.

It would be desirable to separate the office of Chairman and Managing Director in respect of large sized public sector banks. This functional separation will bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the top management of the bank.

The statutory prohibition under section 20 of the Banking Regulation Act, 1949 on lending to companies in which the director is interested, severely constricts availability of quality professional directors on to the Boards of banks. Internationally, however, banks are permitted to extend credit facilities to companies in which the directors are interested subject to full disclosure and appropriate covenants. This would require a change in the existing legal framework. We need to move towards this goal.

The information furnished to the Board should be wholesome, complete and adequate to take meaningful decisions. A distinction needs to be made between statutory items and strategic issues in order to make the material for directors 'manageable'. The manner in which the Board proceedings are recorded and followed up in public sector banks leaves much scope for improvement. The Reviews dealing with various performance areas could be put up to the Supervisory Committee of Board and a summary of each such review could be put up to the Main Board. The Board's focus should be devoted more on strategy issues, risk profile, internal control systems, overall performance of the bank, etc.

The procedure followed for recording of the minutes of the board meetings in banks and financial institutions should be uniform and formalised. Banks and financial institutions may adopt two methods for recording the proceedings viz., a summary of key observations and a more detailed recording of the proceedings. In every meeting, the board should review the status of the action taken on the points arising from earlier meetings and till action is completed to its satisfaction; the pending items should continue to be put up before the board.

It would be desirable if the exposures of a bank to stockbrokers and market-makers as a group, as also exposures to other sensitive sectors, viz., real estate etc. are reported to the Board regularly. The disclosures in respect of the progress made in putting in place a progressive risk management system, the risk management policy, strategy followed by the bank, exposures to related entities, the asset classification of such lendings / investments etc. conformity with Corporate Governance Standards etc., be made by banks to the Board of Directors at regular intervals as prescribed.

All banks should consider appointing qualified Company Secretary as the Secretary to the Board and have a Compliance Officer (reporting to the Secretary) for monitoring and reporting compliance with various regulatory / accounting requirements.

There could be a Supervisory Committee of the Board in all banks, be they public or private sector, which will work on collective trust and at the same time, without diluting the overall responsibility of the Board. Their role and responsibilities could include monitoring of the exposures (credit and investment) review of the adequacy of risk management process & upgradation thereof, internal control systems and ensuring compliance with the statutory / regulatory framework.

The Audit Committee should, ideally be constituted with independent / non-executive directors and the Executive Director should only be a permanent invitee. However, in respect of public sector banks, the existing arrangement of including the Executive Director and nominee directors of Government and RBI in the Audit Committee may continue.

The Chairman of Audit Committee need not be confined to the Chartered accountant profession but can be a person with knowledge on 'finance' or 'banking' so as to provide directions and guidance to the Audit Committee, since the Committee not only looks at accounting issues, but also the overall management of the bank.

It is desirable to have a Nomination Committee for appointing independent / non-executive directors of banks. In the context of a number of public sector banks issuing capital to the public, a Nomination Committee of the Board may be formed for nomination of directors. representing shareholders.

With a view to building up credibility among the investor class, the Group srecommends that a Committee of the Board may be set up to look into the grievances of investors and shareholders, with the Company Secretary as a nodal point.

The formation and operationalisation of the Risk Management Committees in pursuance of the guidelines issued by the RBI should be speeded up and their role further strengthened.

The banks could be asked to come up with a strategy and plan for implementation of the governance standards recommended and submit progress of implementation, for review after twelve months and thereafter half yearly or annually, as deemed appropriate.