Corporate Governance in Banking Sector: A Case study of State Bank of India

Abstract: The issue of corporate governance has come up mainly in the wake up economic reforms
characterized by liberalization and deregulation. Corporate governance has at its backbone a set of transparent relationships between an institutions management its board, shareholders and other stakeholders. The objective of the research paper is to evaluate the corporate governance practice in banking sector particularly in the State ank of !ndia. "or evaluation purpose, this research paper is divided into two parts. #ith the help of secondary data, this work was analyzed and based on different elements of the practice of corporate governance evaluated in State ank of !ndia. The !ndian banking system is among the healthier performers in the world. !n the liberalized economic environment and integration of the country at present the banking sector in !ndia cannot ignore the importance of corporate governance. The corporate governance philosophy of banks is the pursuit of sound business ethics and strong professionalism that aligns the interests of all stakeholders and the society. The State ank of !ndia is the largest bank amongst all public and private sector banks in !ndia. !t is the second largest bank in the world measured by the number of branch offices. The bank provides various domestic, international and $%! products and services through its vast network in !ndia and overseas. State ank of !ndia needs to ensure good corporate governance in order to achieve e&cellence, transparency, ma&imization shareholders value and wealth. Keywords: Corporate 'overnance, anking Sector, State ank of !ndia. I. INTROD CTION The issue of corporate governance has come up mainly in the wake up of economic reforms characterized by liberalization and deregulation. According to OECD the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board managers shareholders and other stakeholders and it also spells out the rules and procedures for making decisions on corporate affairs. Corporate governance is e!clusively of board of directors in a manner that it becomes a way of organizational life and not merely written rules or regulations or code of ethics. Ethics and transparency are cardinals of corporate governance. The seeds of modern corporate governance were probably sown by the watergate scandal in the "#A. #ubse$uent investigations by "# regulatory and legislative bodies highlighted control failures that had allowed several ma%or corporations to make illegal political contributions and bribe government officials. &hile these developments in the "# stimulated debate in the "' a spate of scandals and collapses in that country in the late ()*+s and early ())+s led shareholders and banks to worry about their investments. #everal companies in "' which saw e!plosive growth in earnings in the ()*+s ended the decade in a memorably disastrous manner. ,n -ay ())( the .ondon #tock E!change set up a committee under the chairmanship of #ir Arian Cadbury to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is e!pected of them. The committee investigated accountability of the board of directors to shareholders and to the society. ,t submitted its report and the associated /code of best practices in December ())0 wherein it spelt out the methods of governance needed to achieve a balance between the essential powers of the board of directors and their proper accountability.

II.

!OR"D SC#NARIO

Contemporary corporate governance started in ())0 with the Cadbury report in the "'. Cadbury was the result of several high profile company collapses and was concerned primarily with protecting weak and widely dispersed shareholders against self1interested directors and managers.

Corporate 'overnance in anking Sector( ) Case study of State ank of !ndia

The corporate governance initiative in ,ndia was not triggered by any serious nationwide financial banking and economic collapse. The initiative in ,ndia was driven by The Confederation of ,ndian ,ndustry. ,n December ())2 C,, set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in ())3. ,n April ())* the code was released. ,t was called 4Desirable Corporate 5overnance6 A Code7. 8ollowing C,,s initiative the #ecurities and E!change 9oard of ,ndia :#E9,; set up a committee under 'umar -angalam 9irla to design a mandatory1cum1recommendatory code for listed companies. The 9irla Committee <eport submitted in 8ebruary 0+++ and it was approved by #E9, in December 0+++. The report became mandatory for listed companies through the listing agreement and implemented according to a rollout plan. 8ollowing C,, and #E9, the Department of Company Affairs :DCA; modified the companies Act ()2= to incorporate specific corporate governance provisions regarding independent directors and audit committees.

III.

INDIAN SC#NARIO

I$.

OB%#CTI$#S AND &#T'ODO"OG(

The ob%ective of the research paper is to evaluate the corporate governance practice in banking sector through a case study of the #tate 9ank of ,ndia. 8or evaluation purpose this research paper divided into two parts. 9ased on different elements of and with the help of secondary data this work has analyzed and evaluated the practice of corporate governance in #tate 9ank of ,ndia. ,n the first part the concepts of corporate governance like evolution of corporate governance in world and ,ndian scenario role and importance of corporate governance in banking sector has been discussed. The second part analyses the practice of corporate governance as determined in #tate 9ank of ,ndia with the help of elements like board practices stakeholders and transparent disclosure of information.

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COR)ORAT# GO$#RNANC# IN INDIAN BAN*ING S#CTOR

The corporate governance practice is important for banks in ,ndia because ma%ority of the banks are in public sector where they are not only competing with one another but with other players in the banking system . 8urther with restrictive support available from the government for further capitalization of banks many banks may have to go for public issues leading to transformation of ownership. The banks form an integral part of the economy of the country and an y failure in a bank might have a direct bearing on the financial health of the country. The 9asel committee on banking supervisory authorities was established by the Central 9ank 5overnors of the 5(+ developed countries in ()32. The 9asel committee in the year ())) had brought out certain important principles on corporate governance for banking organizations which more or less have been adopted in ,ndia. The minimum impact of recession on ,ndian economy was because of strong and effective nature of banking sector in ,ndia. #tate 9ank of ,ndia is the countrys largest commercial bank in terms of profits assets deposits branches and employees. &ith over 0++ years of e!istence #tate 9ank group has a presence in >> countries and e!tensive network of more than (* +++ branches and 0= +++ plus AT-s and (++ million accounts across the country. The only ,ndian 9ank to feature in the 8ortune 2++ list #9, has 2 Associate banks and 3 #ubsidiaries arguably the largest in the world. &ith millions of customers across the country #9, offers a complete range of banking products and services with cutting edge technology and innovative banking model. #tate 9ank of ,ndia is committed to the best practices in the area of corporate governance. The sound corporate governance practice in #tate 9ank of ,ndia would lead to effective and more meaningful supervision and could contribute to a collaborative working relationship between bank management and bank supervisors. 9ased on different elements like boards practices stakeholders services and transparent disclosure of information the practice of corporate governance in state bank of ,ndia was assessed.

$I.

COR)ORAT# GO$#RNANC# IN STAT# BAN* O+ INDIA

$II.

BOARD )RACTIC#S

Centra, Board The central board of directors was constituted according to the #9, Act ()22. The banks central board draws its powers from and carries out its functions in compliance with the provisions of #tate 9ank of ,ndia Act ? <egulations ()22. ,ts ma%or roles include among others overseeing the risk profile of the bank@

Corporate 'overnance in anking Sector( ) e!pert Case study of Stateand ank of !ndia monitoring the integrity of its business and control mechanisms@ ensuring management ma!imising the interests of its stakeholders. The central board has constituted seven board level committees.

-... Audit Co//ittee of t0e Board: AC9 provides direction as well as oversees the operation of the total audit function in the bank. Total audit function implies the organizational operational $uality control of internal audit and inspection within the bank follow1up on the statutory audit and compliance with <9, inspection. ,t also appoints statutory auditors of the bank and reviews their performance from time to time.AC9 reviews the banks financial risk management ,# audit policies and accounting policies of the bank to ensure greater transparency. -.1. Risk &anage/ent Co//ittee of t0e Board: <-C9 was constituted to oversee the policy and strategy for integrated risk management relating to credit risk market risk and operational risk. -.2. S0are0o,ders34Investors3 Grievance Co//ittee of t0e Board : #,5C9 was formed to look into the redressal of shareholders and investors complaints regarding transfer of shares non 1receipt of annual report non1receipt of interest on bondsAdeclared dividends etc. -.5. Specia, Co//ittee of t0e Board for &onitoring of "arge $a,ue +rauds: The ma%or functions of the committee are to monitor and review all large value frauds with a view to identifying systemic lacunae if any reasons for delay in detection and reporting monitoring progress of C9, A Bolice investigation recovery position and reviewing the efficacy of remedial action taken to prevent recurrence of frauds. -.6. Custo/er Service Co//ittee of t0e Board: C#C9 was constituted to bring about ongoing improvements on a continuous basis in the $uality of customer service provided by the bank. -.7. IT Strategy Co//ittee of t0e Board: &ith a view to tracking the progress of the banks ,T initiatives the #9,s central board constituted a technology committee of the board. The committee has played a strategic role in the banks technology domain. -.-. Re/uneration Co//ittee of t0e Board: ,t was constituted for evaluating the performance of whole time directors of the bank in connection with the payment of incentives as per the scheme advised by 5overnment of ,ndia. ,t is found that in #9, these committees are providing effective professional support in the conduct of board level business in key areas. $III. STA*#'O"D#RS S#R$IC#S The #9, strongly believes that all stakeholders should have access to complete information on its activities performance and product initiatives. 8... S0are0o,ders: The #9, is providing different types of services and facilities to the shareholders. #hare transfers in Bhysical form are processed and returned to the shareholders within stipulated time. #9, has the distinction of making uninterrupted dividend payment to the shareholders at an increasing rate for many years. ,n accordance with the #E9, guidelines on green initiative in corporate governance #9, is issuing annual report in electronic form to shareholders who opt for receiving the same in electronic form through their e1mails. To meet various re$uirements of the investors regarding their holdings the 9ank has a full1fledged department i.e. shares and bonds department and shares and bonds cells at the (C local head offices. 8.1. Custo/ers6 &ith a large network and number of branches throughout ,ndia and abroad #9, is providing different types of services and facilities to the customers. 8.1.. AT&s: #tate 9ank group has in its stable variants of AT-s. The number of AT-s of the #9, group was 02 ++2 in -arch 0+(( and they increased to 03 0*= in -arch 0+(0. The number of AT-s of #9, was 0+ +*C in 0+(( and they are 00 (C( in 0+(0. The total debit cards issued by #9, were 30* lakhs in 0+(( and they increased to )(+ lakhs in 0+(0. 8.1.1 &o9i,e Banking: There were (+.(> lakh registered mobile customers in 0+(( and they increased to >=.C2 lakhs in 0+(0. The customers were using the service with more than (.0+ lakhs daily transactions

around C=D of which are financial transactions amounting to <s. 0.C2 crores. #9, has launched mobile technology based prepaid payment services under the brand name of #tate 9ank -obi Cash. 8.1.2 Internet Banking: ,nternet banking service is available through www.onlin esbi.co.in for both retail and corporate customers of the bank. The number of customers in -arch 0+(( was =0.23 lakhs and they increased to

*).=> lakhs in -arch 0+(0. The number of transactions during 0+(+10+(( was (C>3.C= lakhs and in 0+((1(0 it increased to 0=(+.>0 lakhs. 8.1.5 +oreign Offices: The #9, is operating (3> branches in >C countries including 0 O9"s in ,ndia to run their operations on a common banking applications software with their databases connected to a central data centre backed up by a synchronized disaster recovery site. All foreign offices use internet banking channel and (>+ AT-s at various locations abroad cater to the banks overseas customers with most of the AT-s connected to the centralized AT- switch in ,ndia. 8.1.6 Custo/er Co/p,aints: The number of complaints received from the customers during the year 0+(+1(( was >+ )+C and they increased to C=0 >*( during 0+((1(0. 8.2. #/p,oyees: The #9, had a total permanent staff strength of 0 (2 C*( in the -arch 0+(0. Of this *+ C+C :>3.>0D; were officers )2 3(2:CC.C0D; were clerical staff and the remaining >) >=0 :(*.0=D; were sub1 staff. ,t has been decided to recruit )2++ new clerical staff during the year 0+(01(> to meet the growing business needs of the bank. The #9, has transferred <s. C) 2(* crores to the #9, employees pension fund trust from the special provision account during the year 0+((1(0. An amount of <s. C2>(.*> crores is recognised as an e!pense towards the provident fund scheme of the bank. The bank has implemented a defined contribution pension scheme :DCB#;. The contributions of the bank of <s. C20.C3 crores have been retained as a deposit with the bank and earn interest at the same rate as that of the current account of provident fund. An amount of <s. C2>(.>> crores :previous year C332.3C crores; is provided towards long term employee benefits. 8.5. Society: The e!ecutive committee of the central board has approved a comprehensive policy for corporate social responsibility in August 0+((. During the year 0+((1(0 the #9, has spent <s. 3(.(* crores for various social service activities like supporting education :<s. >2.>> crores; Eealthcare :<s. (2.+> crores; and donations :<s. 2.2+ crores;. I:. DISC"OS R# AND TRANS)AR#NC( Disclosure and transparency are the important pillars of a corporate governance framework enabling ade$uate information flow to various stakeholders and leading to informed decisions. The #9, was implementing all the provisions of corporate governance and disclosure in the important and confidential information. Table ( shows confidential information of #9, as a part of transparent disclosure of information. ;.. )ri/ary Business Seg/ent Infor/ation of SBI: ,n the primary segment the treasury segment includes the entire investment portfolio and trading in foreign e!change contracts and derivative contracts@ the corporate Awhole sale banking segment comprises the lending activities of corporate accounts group mid1 corporate account group and stressed assets management group and the retail banking segment comprises of branches in national banking group which primarily includes personal banking activities including lending activities to corporate customers. This segment also includes agency business and AT-s. Ta9,e: . SBI )ri/ary 4 Geograp0ic Business Seg/ents during 1<..=.1 ><s. ,n crores; 9usiness (. Brimary 9usiness #egment 0. 5eographic #egments ( or 0 #egment #egments Treasury Corporate <etail Domestic 8oreign Total A&hole sale 9anking 9anking <evenue 0> *3C C0 33> 2C +)( ( (C +*+ = =2) ( 0+ 3>) :0( ==2; :>0 )>2; :C0 +=0; :)( +*=; :2 23=; :)= ==0; #egment > >2 +(= > )C C0( 2 )2 (*0 (( 22 (3= ( *+ >C0 (> 0C =0( Assets :> (+ 20C; :> *( >0+; :2 00 =)); :(+ *0 >*3; :( C( >C*; :(0 (C 2CC; #egment ( )= 000 > *( 0+0 = 0* C3) (+ 3( 002 ( *+ >C0 (0 +2 )+> .iabilities :( =0 (C); :> =3 C)2; :2 *2 +(2; :(+ (3 C+(; :( C( >C*; :(( (C =2); 8igures in brackets are for previous year

;.1 Secondary Geograp0ic Seg/ents infor/ation of SBI: ,n this segment domestic operations are branchesA offices having operations in ,ndia. 8oreign operations are branchesAoffices having operations outside ,ndia and offshore banking units having operations in ,ndia.

The table1( e!plains the revenue assets and liabilities based on primary business segment with e!plaining treasury corporateAwholesale banking and retail banking. The geographic segment e!plains domestic and foreign areas performance during 0+(+1(( and 0+((1(0. ;.2 #arnings per s0are of SBI: The basic earnings per share are computed by dividing the net profit after ta! by the weighted average number of e$uity shares outstanding for the year. The net profit in 0+(+1(( was <s. *0=C.20 crores and it increased to <s. (( 3+3.0) crores in 0+((1(0. 9asic earning per share in 0+(+1(( is <s. (>+.(= and it increases to <s. (*C.>( in 0+((1(0. ;.5 Detai,s of Different )rovisions and Contingencies: The provisions and contingencies of #9, during 0+((1 (0 are e!plained in table 0. The total provisions are <s. (3 +3(.+2 crores in 0+(+1(( and they increased to <s. () *==.02 crores during 0+((1(0. Ta9,e: 1 )rovisions and Contingencies :<s. in crores;
)rovisions Current Ta! Deferred Ta! Depreciation on ,nvestments Fon1Berforming Assets <estructured Assets #tandard Assets Total 1<..=1<.1 = >>2.>3 C22.)> =*>.0* (( C)C.(+ 2(.3= )3*.*( () *==.02 1<.<=1<.. 2 3+).2C )3=.*0 =C=.32 * C(2.CC >3=.=2 )3=.=+ (3 +3(.+2

;.6 Detai,s of Concentration of Advances? #@posures A N)As Infor/ation of SBI: Table > demonstrates the concentration of deposits advances e!posures and FBAs information during 0+(+1(( and 0+((1(0. The table e!plains the operational weaknesses in the #9, regarding issue of advances to twenty largest borrowers concentration of e!posure with twenty largest borrowers and concentration of FBAs with four FBA accounts. Ta9,e: 2 Concentration of Advances? #@posures A N)As :<s. in crores; Barticulars 0+((10+(0 0+(+10+(( Concentration of Advances *> ()).*+ =2 0>=.0( :Twenty .argest 9orrowers; Concentration of E!posures 0 (> 33C.=0 0 +3 033.C+ :Twenty .argest 9orrowers ; Concentration of FBAs 0 )>(.2( 3>+.03 :8our FBA Accounts; :. +INDINGS AND CONC" SION The study found that the #9, is implementing all the provisions of corporate governance according to the <9,A5O, directions. ,t is found that #tate 9ank of ,ndia the countrys largest commercial bank performed well in every aspect in terms of profits assets deposits branches employees and services to customers. The study found that the #9, conducted different board meetings regularly to provide effective leadership functional matters and monitors banks performance. ,t is found that the #9, established clear documentation and transparent management processes for policy development implementation decision1 making monitoring control and reporting. Even though the #9, is showing good performance and implementing provisions of corporate governance some lapses have to be rectified for increasing the performance. The #9, is operating nearly (+ crores of customer accounts. Among them the net banking operating customers are *).=> lakhs mobile banking operating customers >=.C2 lakhs customers using AT-s are )(+ lakhs. Though the customers operating e1banking are increasing every year they are using e1banking for normal or minimum services. ,t is suggested that consumer service committee must take initiative steps to increase online banking services through customer awareness programs and internet banking training programmes. ,t decreases customers pressure on branches and it is useful to reduce customers waiting time in all branches.

The study found that customers complains are increased during the year 0+((1(0 :C =0 >*(; when compared to the previous year 0+(+10+(( :>+ )+C;. Consumer service committee must take initiative steps to satisfactorily address customers complaints.

The study found that concentration of advances to twenty largest borrowers increased from <s. =2 0>= crores in 0+(+10+(( to <s. *> ()) crores in 0+((10+(0 indicating credit risk. ,t is suggested that the credit risk management should take necessary steps to minimize risks. The study found that concentration of e!posures to twenty largest borrowers has increased from <s. 0 +3 033.C+ crores in 0+(+1(( to <s. 0 (> 33C.=0 crores in 0+((1(0 indicating credit risk. ,t is suggested that the central board should take immediate action to reduce the concentration of e!posures. ,t is found that the concentration of FBAs total e!posure to top four FBA accounts was <s. 3>+.03 crores in 0+(+1(( and it is increased to <s. 0 )>(.2( crores in 0+((10( indicating credit risk. ,t is suggested that the credit risk management should take necessary steps to avoid this type of concentration of FBAs. The #9, is conducting different types of social services activities in different sectors like education healthcare and other areas as a part of social responsibility. The amount spent for this purpose was <s. 3(.(* crores only. ,t is suggested that the amount must be increased for social service activities to draw public attention. 8inally this study concluded that the corporate governance practice in the #tate 9ank of ,ndia should improve for best investment policies appropriate internal control systems better credit risk management better customer service and ade$uate automation in order to achieve e!cellence transparency and ma!imization of stakeholders value and wealth.

R#+#R#NC#S
G(H G0H G>H GCH G2H #tate 9ank of ,ndia Annual <eports &ebsites 6 www.onlinesbi.com I..eeladhar 4Corporate governance in banks7 <9, 9ulletin December 0++C Dr. -eghashree Agarwal Dadhich 6 /Online banking services6 an empirical study of banker s and customers awareness about obs 7 ,C8A, "niversity An overview of 9anking 7 Fagar%una Eills Bublication 0++=. 'rishna .al Bandey 4Development of 9anking in ,ndia since ()C) 7 #cientific 9ook Agency ()=*.