Corporate Governance for banks in January 2008

The Central Bank has issued Directions on Corporate Governance for Licensed Commercial Banks and Licensed Specialised Banks -- with special reference to the role of directors -- which will be effective from January 1, 2008.

These directions have been developed on the basis of certain fundamental principles of corporate governance.

The main aspects covered are the broad responsibilities of the board, board’s composition, criteria to assess the fitness and propriety of directors, management functions delegated by the board, separation of duties of the Chairman and Chief Executive Officer, board appointed committees in relation to integrated risk management, audit, nomination, and human resource and remuneration, related-party transactions and disclosure of financial statements. A number of transitional provisions on several key aspects of these rules have been provided to facilitate smooth transition to these new standards, the bank said.

These rules have been designed to promote a healthy and robust risk management framework for banks, with accountability and transparency through policies and oversight by the boards of directors who along with senior management, are responsible for the management of banks. The implementation of these directions also provides an opportunity to depositors, investors, and other stakeholders to monitor the performance of banks.

“It is, therefore, envisaged that these directions, formulated after extensive consultation with relevant stakeholders, would improve the governance practices of individual banks substantially and would lead to improved confidence in the banking sector, thereby promoting financial system stability,” the statement said.