All the countries, irrespective of their stage of development, need funds for their economic development and growth. In the economy, these funds are obtained from the savers or surplus units (the units which have more income than their consumption) which may be household individuals, business firms, public sector units, Central Government, State Governments, Local Governments, Semi-Governments, etc. There are certain investors or deficit units whose consumption or investment is more than their current income. Therefore, Financial markets play a significant role in transferring this surplus from savers (lenders) to ‘borrowers (investors). This process of ‘transmission mechanism’ is what keeps the financial markets healthy and alive.
If these surplus units called as savers/depositors/creditors are not safeguarded, the financial markets can come to a standstill and it is therefore very important to preserve the rights and interests of these surplus units.
It is violative of the fundamental rights of common people when the directives of the RBI under section 35A is imposed on various bank causing anguish and sufferings to people whose hard-earned money is locked in the banks.
An example of a failure of a banking system due to corporate governance is no other than the ‘Madhavpura Mercantile Cooperative Bank’. In 2001, Ahmedabad’s Madhavpura Mercantile Cooperative Bank went bust. That landed another 210 urban cooperative banks in trouble and some of them had to be liquidated. Even after 18 years the depositors are still in a lurch and haven’t got their money back. The recent PMC Bank issue is another example of poor corporate governance prevailing in the banking sector. It is a breach of fundamental rights of millions of people living in this country who today feel ashamed to call themselves Indians. Tens of hundreds have died of depression due to the unavailability of accessing their funds. This is such a terrible economic failure and leaves a devastating impression on foreign investors and the world apart from the citizens of the country themselves.
I wish to state the following two fundamental right of citizens have also been breached, rather sabotaged with the poor banking system in India
1 Right to Equality
If PSBs can be bailed-in using taxpayer’s money, why can’t the Co-operative banks be bailed-in by the government? The depositors of co-operative banks are included in the people of the country whose tax paid money is being used to bail-in and recapitalize other public sector banks. The government by not bailing-in the co-operative banks in distress is snatching rights of the co-operative bank deposit holders and hence a breach of Right to Equality.
2 Right to Freedom
More than a million people are stuck with their deposits lying in the banks which are under Section 35A of the BR Act. Depositors not able to withdraw their own hard-earned and tax paid money is a breach of the fundamental right, ” Right to Freedom”
If the banking system fails, the entire economy of the country can turn turtle and history has ample examples to prove my point. Since banks are the heart of the economy, it is therefore imperative to practice and enforce strong corporate governance policies and keep a check on the management and the Board of Directors who head the bank.
Banks are sometimes hijacked by vested political interests. This could mean appointing political lackeys as senior bank officials and sanction of fraudulent loans which are later written off. The smooth working of nationalized banks has also been hampered by growing political pressures from the Centre and the States. Nationalized banks often face lots of difficulties due to various political pressures. Such pressures are created in the selection of personnel and grant of loans to particular parties without considering their creditworthiness. We have been seeing a lot of financial and banking-related frauds in the past 3 years especially in the aftermath of the PNB Bank. In the interest of the larger public and to avoid such scams and to protect the interest of the depositors, it is necessary to bring in amendments to the banking system by all possible means especially by forcing more corporate governance standards on banks.
To curb all these malpractices, the management which heads the bank must be under the tight scrutiny of the RBI. While the PNB got away, PMC bank depositors along a lot of other co-operative banks have been suffering depression causing a lot of deaths already, thanks to Section 35a imposed on the banks and special thanks to the management of all such banks.
The key problem as discussed above is the Management itself. Had the management been clean, no bank would have been under Section 35A of the BR Act.
Good management can drift the bank even in a poor or economic slowdown period. It is, therefore, the management of an entity that can make or break an organization
It is because of the people of this country contributing their savings in banks, the economy can thrive. If the fundamental entity of the economy will not be protected, then India should be ready to see times like the “1929 Great Depression of USA”.
So what changes should be brought about in the corporate governance standards of the banking sector in India?
Here are 12 points
1 No individual with any type of political affiliations should be allowed to be on the Board/Management of any Bank
2 No individual who has an immediate family member having political affiliations should be allowed to be on the Board/Management of any Bank
3 No individual who has a family member other than an immediate family having political affiliations should be allowed to be on the Board/Management of any Bank
4 No individual who is also a director at other corporates should be allowed to be on the Board/Management of any Bank
5 No individual who has an immediate family member as a director at other corporates should be allowed to be on the Board/Management of any Bank
6 No individual who has a family member other than immediate family as a director at other corporates should be allowed to be on the Board/Management of any Bank
7 No individual who is at the Board or Management level of the bank should be allowed to receive loans from the same bank.
8 No individual who has an immediate family member at the Board or Management level in the Bank should be allowed to receive loans from the same bank
9 No individual who has a family member other than immediate family at Board or Management level should be allowed to receive loans from the same bank.
10 Any individual granted loans from a bank should be checked for conflict of interest, i.e. no individual should be allowed to receive loans from the bank in which he/she has any kind of relations with Board/Management of the bank.
11 The RBI should get all powers to dismiss or supersede the director(s)/management immediately who are not fit as per defined or prescribed minimum standards.
12 An amendment should be made to Companies Act, 2013 and all related acts to enforce companies to reveal more information under corporate governance standards which the RBI thinks were previously left unrevealed under current sections.