Constitution of the Board

4.1. The Board of Directors has important fiduciary responsibilities to the shareholders of the company. The Board is responsible for the overall management and effective functioning of the bank. The banks, being a corporate entity, the Board of a bank is responsible to the shareholders.

Further, banks being important participants in the payment systems, it is enjoined upon the Boards to safeguard the interests of the depositors and other stakeholders. The Board, however, cannot be expected to supervise the day-to-day operations of the bank and it, therefore, delegates and entrusts appropriate authority to the various functionaries, via the whole -time directors of the Board such as, Chairman, Managing Director and Executive Directors. This makes each whole-time director, individually, and the Board, collectively, responsible for the performance of the bank.

4.2. The challenge facing the Indian banking has been getting the board of directors to shape strategy and monitor performance without encroaching on management terrain or becoming too involved in the bank's day-to-day operations.

4.3. The Group notes that the statutes governing public sector banks vest powers with the Central Government to appoint whole-time directors as also majority of the independent / non-executive directors. The Boards of public sector banks (barring State Bank of India) comprise presently, two whole-time directors (one Chairman & Managing Director and one Executive Director). Considering the fact that banking is becoming more complex, the Group is of the view that one more whole-time director should be appointed on the Boards of large-sized nationalised banks, who could provide undivided attention to critical areas like risk management systems, human resource management, etc.

4.4. The eligibility criteria normally followed for nomination of independent directors to the Boards of public sector banks are the following:

1. The candidate should normally be a graduate (which can be relaxed while selecting directors for the categories of farmers, depositors, artisans, etc.)

2. He / she would be between 35 and 65 years of age.

3. He / she should not be a Member of Parliament /Member of Legislative Assembly/Member of Legislative Council.

The Group is of the view that the above criteria needs to be revised in view of challenges facing the banking sector.

4.5. Presently, the due diligence is done, to a limited extent, by the Reserve Bank of India for the candidates considered for independent / non-executive directorship in public sector banks. The due diligence by RBI is, however, confined to verifying whether the names forwarded by the Government of India figure in the Defaulters' List or not. This due diligence process does not assess either the ability, professional qualification or the technical competence of the candidates being considered for directorship to fulfil the fiduciary responsibilities expected of them.

4.6. In the case of independent / non-executive directors of private sector banks, since they are appointed by the Board, the due diligence exercise is not done by RBI. Such directors are appointed by the Board keeping in view the requirement of giving representation to the specified sectors, as enshrined in the Banking Regulation Act, 1949.

4.7. The Group recommends that the criteria followed by the Government of India for nominating directors to the Boards of public sector banks and the due diligence followed for them should be made applicable to independent / non-executive directors of other banks as well.

4.8. The Group is of the view that due diligence of the directors of all banks -be they in public sector or private sector should be done in regard to their suitability for the post by way of qualifications and technical expertise. The Group strongly feels that involvement of Nomination Committee of the Board in such an exercise should be seriously considered as a formal process. The final decision in respect of appointment of independent / non-executive directors should be that of the Board with the Nomination Committee presenting its recommendations highlighting both positive and negative aspects of each recommended candidate, for consideration of the Board.

4.9. While the desirable international practice of the Board members being nominated by the Nomination Committee from a list of qualified, experienced professionals would require amendments to the banking laws, the Group recommends that 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 Group recommends the criteria suggested by the BIS to consider 'fit and proper" for bank directors:

Competence of the individual directors as assessed in terms of formal qualifications, previous experience and track record.

For assessing integrity and suitability, the features like 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. (cf, "Supervision of Financial Conglomerates", 1998, BCBS). The Group recommends that these criteria should also be made applicable to nomination of independent directors of private sector banks.

4.10.The Group recommends that a pool of professional and talented people should be built up for consideration of nomination as independent / non-executive directors to the Board of banks and financial institutions. The list of such eligible directors should be assembled by RBI from independent sources after proper due diligence and such a list should be put on the RBI's website for access by all concerned. The Group is of the view that appointment / nomination of independent / non-executive directors to the Boards of banks (both public sector and private sector) should be from this list. Any deviation from this procedure by any bank, according to the Group, should be with the prior approval of RBI. RBI may also establish procedures for regularly updating the list through additions and deletions from time to time.

4.11.The Group examined the structure and the composition of the Boards of banks. It is noted that composition of the Boards of banks is more regulation-based rather than need-based. As noted in paragraph 2.2 above, as per the regulation applicable to banks, the Board of Directors of a bank is required to have representation from specific sectors like agriculture and rural economy, co-operation, SSI, law, etc., The Group is of the view that in the context of banking becoming more complex and competitive, the composition of the Board should be left to the business needs of banks. Composition of the Board (by way of representation of various sectors) should be so as to reflect the business strategy and its vision for the future.

4.12.The Group is of the view that in the present context when banking is 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 personnel. The earlier requirement of ensuring representation on the Boards of banks for areas like agricultural sector, law, co-operation, small-scale industry, etc. which were relevant in the immediate post-nationalisation era, in the Group's view, have now to be supplemented by other emerging priorities. The Group feels that instead of attempting to wholly change sectoral representation, efforts should be aimed at bringing about a blend of 'historical skills' set (that is, regulation-based representation of sectors like agriculture, SSI, co-operation, etc.) and the 'new skills' set (that is, need-based representation of skills such as, marketing, technology and systems, risk management, strategic planning, treasury operations, credit recovery, etc

4.13.It was recognised that agriculture still contributes a significant share of GDP and representation to agriculture and SSI, etc., sectors have to be continued. With increased de-regulation and the structural changes that have taken place in the economy and in the banking sector, the Group is of the view that the Boards of banks should have representation in the following areas:

• Finance

• Information Technology

• Human Resources Development

• Persons with good track record of experience in managing / advising industrial enterprises Economics

4.14.The independent / non-executive directors in any organization have a constructive role to play both on-and-off-the Board because of their knowledge and professional objectivity. Within the existing legal framework, the Group is of the view that the independent / non-executive directors must play a more pro-active role by exercising their independence of judgement, practical experience, specialised knowledge, etc. to the deliberations of the Board. The independent / non-executive directors have a prominent role in introducing and sustaining a pro-active governance framework in banks and financial institutions. The independent / non-executive directors, according to the Group, should provide constructive inputs regarding the business strategy, performance of the bank, etc. They should act as the catalyst for focussed discussions on issues brought to the Board and subjects of critical importance to the bank during the meetings of the Board. These directors, being independent, are expected to be free from any organisational affiliation and should seek all information which are relevant to monitor the performance of the bank, the overall risk profile of its credit and investment portfolios, cases of over-exposure to one or a particular group of borrowers or entities related / associated with the promoter directors, etc. According to the Group, the independent / non-executive directors should raise in the meetings of the Board, critical questions relating to -

• business strategy, including loans and recovery policy,

• house keeping and internal control system,

• record of exposure to various sectors / industries by way of both credit and investments, etc.

• risk management systems,

• internal audit,

• accounting policy,

• senior management development,

• other aspects of the functioning of the bank, and

• investor relations.

The independent / non -executive directors need to ensure that the vital issues raised by them are addressed by the bank to the full satisfaction of the Board. While making the above recommendations, the Group is guided by the fact that good corporate governance in banks will be sustained by a knowledgeable, skilful and well informed Board of Directors with a correct blend of expertise / professionalism, independence and involvement.

4.15. 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. They should also seek through the Board, all information relating to critical areas like connected lending, investments, exposure to entities / associates related to the promoters/ large shareholders. The independent / non-executive directors should provide effective checks and balances, particularly, in widely held and closely controlled banking organisations.

4.16. In regard to the existing regulatory prohibition on directors of NBFCs becoming independent / non-executive directors on the boards of banks, the Group is of the view that it would not be proper to debar a professional director on the board of an NBFC from becoming a director on the board of a bank. It needs to be noted that as per the existing policy, NBFCs satisfying certain criteria (such as, AAA rating, minimum net worth of Rs. 200 crore, CRAR of not less than 12%, net NPA not more than 5%, etc.) are allowed to be converted to a bank. In view of the above policy stance, the Group feels that it would not be fair to debar directors on the boards of NBFCs becoming independent / non-executive directors on the boards of banks. In order to avoid any likely conflict of interest, the Group recommends that a director on the board of a NBFC could be considered for appointment as director on the board of a bank if -

1. He/she is not the owner of the NBFC, [i.e., holdings (single or jointly with relatives, associates, etc. ) exceeding 50%] or

2. He/she is not related to the promoter of the NBFC, or

3. He/she is not full-time employee in the NBFC.

In regard to full-time employees of NBFCs, the Group feels that the Reserve Bank of India as the regulator, should have the discretion for considering such person for directorship in a bank, keeping in view the specific circumstances, merits , etc. of each case.