The
corporate governance of banks is different and unique from that of the other
organizations. This is because the activities of the bank are less transparent
than other organizations. Thus, it becomes difficult for shareholders and
creditors to monitor the activities of the bank. The situation becomes even
more difficult when a major part of the share capital is with government.
Additionally, banks also differ from most other companies in terms of the
complexity and range of their business risks, and the consequences if these
risks are poorly managed.
The
Banking Sector in India has definitely not remained unaffected to the
developments taking place worldwide. Enhancing the level of corporate
governance structure of Indian banks is imperative. The regulatory bodies in
India are the Reserve Bank of India and the Securities Exchange Board India.
The RBI prescribes prudential principles and norms. The RBI performs the corporate
governance function under the Board for Financial Supervision (BFS).
The
Basel Accord was first established in 1988 by the Basel Committee on Banking
Supervision under the Bank for International Settlements. The BIS was
established on 17 May 1930 and is the world's oldest international financial
organization. The Basel Committee was established by the central-bank Governors
of the Group of Ten countries in 1974. It meets regularly four times a year. It
has four main working groups. The Basel Committee on Banking Supervision
provides a forum for regular cooperation on banking supervisory matters. Its
objective is to enhance understanding of key supervisory issues and improve the
quality of banking supervision worldwide.
The
Basel Accord was established to provide a set of minimum capital requirements
to banks. According to this accord, the banks would be required to maintain a
minimum capital requirement a propos the loans given out by them. The 1988
Basel Accord also known as Basel I primarily focused on credit risk. The
Central Banks of several countries that have agreed to become signatories have
been given the responsibility of enforcing the provisions. In India, the
Reserve Bank of India shoulders this responsibility.
The
second of the Basel Accords, Basel II was first published in June 2004 and
established in 2005. This accord widened the scope of Basel I by establishing
capital requirements for market risk and operational risk, in addition to
credit risk. Basel II also included provisions which allowed banks to use
advanced statistical methods to compute possible losses for which they were
required to hold capital. Therefore, international banks had an advantage as
they could lower their capital requirements through the use of advanced models.
The
third of the Basel Accords, Basel III was created in response to the flaws in
financial regulation which led to the crisis and also due to appeals for the
reform of capital adequacy and liquidity standards for banks.
According
to the Basel Committee Report of 1999, Banks have to maintain a certain level
of transparency and disclosures in their statements. The annual report should
disclose a number of factors relating to the operations of the banks such as
accounting ratios, business per employee, related party disclosures and
information.
Recent Steps Taken by Banks in India for CG
• Induction
of non-executive members on the boards
• Constitution
of various Committees like Management committee, Investor’s Grievances committee,
ALM committee, etc.
• Role
of Independent auditor
• Gradual
implementation of prudential norms as prescribed by the RBI,
• Introduction
of Citizens Charter in banks
• Implementation
of “Know Your Customer” concept
• The
Board of Directors and top management of the Bank are chiefly responsible for
good CG.
Frauds by others
• Forgery
and altered cheques -This type of fraud involves altering the amount on the
face of a cheque for nefarious purposes
• Stolen
cheques -This type of fraud is initiated by the theft of a few cheques. Then
accounts are opened using fake identities, and the suitably altered stolen
cheques are deposited, followed by convenient withdrawal of the amount. In a
similar way, stolen blank cheque books are misused by fraudsters.
• Accounting
fraud -Overstating sales and income, dishonest accounting and inflating the
worth of the company’s assets to hide that the company is actually functioning
in loss constitute Accounting Fraud. E.g., Satyam.
• Credit
card fraud - Credit cards lend themselves to several opportunities for fraud.
Made of three PVC sheets, of which the central sheet is known as the core
stock, credit cards carry substantial data. Credit card frauds can be carried
out in several ways.
• Frauds
committed by auditors
• Power
of Attorney fraud- A “Power of Attorney” (“POA”) is a legal document through
which the donor grants the power to his attorney to ‘step into the donor’s
shoes’ and conduct legal and financial matters on the donor’s behalf.
• Phishing-
In this type of fraud, sensitive data such as account numbers, login
Independent Directors (IDs), passwords, and other verifiable information are
extracted from gullible individuals either through fraudulent telephone calls
or emails. These data are then misused for dishonest purposes, including
identity theft. Phishing is most often perpetrated through mass emails and
spoofed websites.
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