Taking care of bank hygiene issues

The Financial Services Institutions Bureau (FSIB) will reportedly play a critical role in the governance of public sector banks (PSBs) by not just identifying bank directors but also training them. This is fine. But despite the efforts by regulators and policymakers, corporate governance remains a tick-the-box exercise. That must change. Global economic uncertainty has accentuated financial sector risks, underscoring the need for regulators to mitigate vulnerabilities through timely action, and also for independent directors to step up oversight, secure risk management and deterrence of fraud. Fit and proper criteria for membership on bank boards and sound methods for selection of board members – domain experts – count. Independent directors must be willing to rock the boat in the pursuit of management accountability to shareholders.

Systemic reform is also needed. GoI says it has ended political interference in banking operations. That is the first step. Market- based salaries for senior bankers akin to those in the private sector must follow to help attract the best talent and disincentivise any underhand ways of bankers enriching themselves. PSB boards can appoint chief risk officers with market-determined compensation, which must be extended to senior bankers. A tiered compensation structure with a decent upfront part, and larger components tied to the banks’ long-term performance, subject to clawback, will foster the culture to maximise returns in the long run.

The Basel Committee on Banking Supervision held it is corporate governance at a bank that defines its integrity, operational excellence and compliance with supervision. But scams have proliferated as supervision lags the technology. That needs to change, too.