Assignment Code: MMPB – 006/TMA/ JULY/2024 

Course Code: MMPB – 006

Assignment Name: Corporate Governance in Banking and Financial Sector

Year: 2024-2025

Verification Status: Verified by Professor

1. Explain the different models of Corporate Governance? Explain Asian Family based model with the help of a suitable example. 

Ans) Corporate governance refers to the system by which companies are directed and controlled. It involves the relationships among the management, board of directors, shareholders, and other stakeholders. Various models of corporate governance have emerged across different regions and industries, shaped by cultural, legal, and market factors. These models include the Anglo-American model, the Continental European model, the Japanese model, and the Asian Family-based model, each with its distinct characteristics. 

Anglo-American Model: 

The Anglo-American model, prevalent in the United States and the United Kingdom, is shareholder-centric. It emphasizes maximizing shareholder value and relies on strong legal protections for investors. In this model, the board of directors, composed mainly of non-executive members, plays a critical role in supervising the company’s management. The market for corporate control is a vital disciplinary mechanism, with hostile takeovers often serving as a way to rectify underperformance. 

Continental European Model: 

The Continental European model, common in countries like Germany and France, follows a stakeholder-centric approach. Companies in this system focus not only on shareholders but also on employees, creditors, and society at large. One of the unique features of this model is the two-tier board structure, which consists of a supervisory board and a management board. The supervisory board, which includes employee representatives, oversees the management board. This model emphasizes long-term stability and worker protection. 

Japanese Model: 

The Japanese model of corporate governance also follows a stakeholder approach, with a strong emphasis on company loyalty and group decision-making. It incorporates lifetime employment and long-term relationships with banks and suppliers. Cross-shareholding between companies and their banks or business partners is common, making external takeover threats relatively rare. This model is characterized by consensus-driven decision-making, prioritizing the interests of employees, suppliers, and the broader community. 

Asian Family-Based Model: 

The Asian Family-based model is prevalent in many East and Southeast Asian countries like India, South Korea, Hong Kong, and Singapore. This model is characterized by concentrated ownership, with families often controlling a significant portion of the company’s shares. Family members tend to hold key management positions, and decision-making is centralized within the family. Corporate governance in this model often reflects the interests and values of the founding family, leading to a long-term perspective and continuity in business operations. 

However, the Asian Family-based model may face challenges, such as potential conflicts of interest between family and non-family shareholders, lack of transparency, and weaker protections for minority shareholders. The board of directors, though present, may have limited independence, as family members hold significant influence over the company’s operations. 

Example: Tata Group in India: 

An illustrative example of the Asian Family-based model is the Tata Group, one of India's largest and most respected conglomerates. Founded in 1868 by Jamsetji Tata, the Tata family has played a crucial role in its governance and operations. The group is still controlled by Tata Trusts, which are largely influenced by family members. Ratan Tata, a notable member of the Tata family, led the group for decades and guided its strategic direction. While the company operates with professional management and a board of directors, the influence of the Tata family remains significant. 

The Tata Group’s governance reflects key elements of the Asian Family-based model, such as long-term stability, social responsibility, and strong leadership from the founding family. However, it also incorporates aspects of modern corporate governance, including transparency and professional management, which help mitigate some of the challenges typical of family-based governance. 

2. Explain introduction of Basel Norms in India. Describe Reserve Bank of India’s Approach to Implementation of Basel Norms in India? 

Ans) Basel norms refer to international regulatory frameworks developed by the Basel Committee on Banking Supervision (BCBS) to strengthen the regulation, supervision, and risk management of the banking sector. These norms aim to ensure that banks maintain sufficient capital to absorb unexpected losses and manage risks effectively, thereby promoting financial stability. The norms were introduced in three stages: Basel I (1988), Basel II (2004), and Basel III (2010), each focusing on enhancing different aspects of risk management and capital adequacy. India, as a member of the global financial system, has progressively adopted these norms under the guidance of the Reserve Bank of India (RBI). 

Introduction of Basel Norms in India: 

India's adoption of Basel norms began with Basel I in the early 1990s, following the economic liberalization and reforms that aimed to modernize its banking sector. Basel I was primarily focused on credit risk and required banks to maintain a minimum capital adequacy ratio (CAR) of 8%. In response, the RBI mandated Indian banks to hold a minimum CAR of 9%, slightly above the global standard, reflecting its conservative approach to banking regulation. The introduction of Basel I helped strengthen the capital base of Indian banks, ensuring they had adequate buffers to protect against credit risk. 

With the implementation of Basel II in 2004, India moved towards a more comprehensive risk management framework. Basel II focused on three pillars: minimum capital requirements, supervisory review, and market discipline. It introduced advanced methodologies for calculating capital requirements for credit risk, market risk, and operational risk. The RBI took a phased approach to implementing Basel II, beginning with larger banks in 2008 and later extending it to all scheduled commercial banks by 2009. This transition aimed to improve risk sensitivity, encouraging Indian banks to adopt better risk management practices. 

After the global financial crisis in 2008, Basel III was introduced to address the shortcomings of the previous frameworks, particularly regarding capital quality, liquidity, and leverage. Basel III focuses on improving the quality of capital, enhancing liquidity standards, and introducing a leverage ratio to limit excessive borrowing. India adopted Basel III in 2013, with a phased implementation plan extending until 2019, though the timeline was later extended due to the challenges posed by the COVID-19 pandemic. Basel III mandates Indian banks to hold a higher proportion of common equity, as well as capital buffers like the Capital Conservation Buffer (CCB) and Countercyclical Capital Buffer (CCyB). 

Reserve Bank of India’s Approach to Implementation of Basel Norms: 

The RBI has played a pivotal role in the adoption and implementation of Basel norms in India. It has consistently followed a conservative and proactive approach, often imposing stricter requirements than the global minimum to safeguard financial stability. For instance, the RBI set the minimum capital adequacy ratio (CAR) at 9%, which is higher than the Basel requirement of 8%. This additional buffer reflects the RBI’s focus on ensuring that Indian banks remain well-capitalized to absorb potential losses. 

Furthermore, the RBI has been mindful of the differences between India’s banking system and those in advanced economies. While implementing Basel II and Basel III, the RBI allowed Indian banks to transition gradually, taking into account their financial strength and capacity to meet the new norms. The RBI has also encouraged Indian banks to enhance their risk management frameworks, improve transparency, and adopt international best practices. 

The RBI's phased approach has helped banks manage the transition smoothly. For example, under Basel III, the RBI implemented the Capital Conservation Buffer and Liquidity Coverage Ratio in stages to avoid sudden disruptions to the banking system. Moreover, the RBI’s focus on capital quality, with a preference for equity over debt instruments, aligns with global efforts to ensure that banks have sufficient high-quality capital to absorb shocks. 

3. What is a Non Banking Financial Company? Differentiate Non Banking Financial Companies (NBFCs) from Banks. Explain the role of NBFCs in Economic Development of a country. 

Ans) A Non-Banking Financial Company (NBFC) is a financial institution that provides banking-like services without holding a banking license. NBFCs are regulated by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934, and they engage in various financial activities such as lending, leasing, hire purchase, insurance, and investments. However, NBFCs are distinct from traditional banks in several ways, primarily due to regulatory restrictions and the types of services they offer. 

Differences Between NBFCs and Banks: 

Regulation and Licensing: Banks are tightly regulated and licensed by the central bank, i.e., the RBI in India. They are governed by the Banking Regulation Act, 1949, and need to follow stringent norms regarding capital adequacy, liquidity, and risk management. In contrast, NBFCs are regulated under the RBI Act, 1934, and face relatively fewer regulatory constraints, although they must still meet certain capital and prudential requirements. 

Deposits: One of the most significant differences between banks and NBFCs is their ability to accept demand deposits. Banks are authorized to accept both demand deposits (like savings and current accounts) and time deposits (fixed deposits). NBFCs, on the other hand, are not allowed to accept demand deposits, meaning they cannot provide checking account services or facilitate withdrawals on demand, though some NBFCs can accept fixed-term deposits under specific conditions set by the RBI. 

Payment and Settlement Systems: Banks have access to the national payment system and can issue checks, debit cards, credit cards, and facilitate real-time transactions. NBFCs do not have direct access to these systems and cannot issue such instruments, limiting their role in payment processing. 

Statutory Requirements: Banks are required to maintain certain statutory reserves like the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) with the RBI. These reserves are part of the central bank’s mechanisms to control liquidity and ensure financial stability. NBFCs are not subject to CRR or SLR requirements, though they must comply with prudential norms regarding capital adequacy and liquidity. 

Credit Creation: Banks have the ability to create credit through fractional-reserve banking, where they lend out a portion of their deposits while keeping only a fraction as reserves. NBFCs, however, cannot create credit in the same way since they are not permitted to hold demand deposits. 

Role of NBFCs in Economic Development: 

NBFCs play a crucial role in fostering economic development, particularly in emerging economies like India, where access to traditional banking services may be limited, especially in rural and semi-urban areas. Their ability to provide a wide range of financial services helps address gaps in the financial system, particularly by offering credit to underserved sectors like small and medium-sized enterprises (SMEs), individuals without formal credit histories, and rural households. 

Financial Inclusion: NBFCs contribute to financial inclusion by extending credit and financial services to segments of the population that are underserved by traditional banks. They cater to the financing needs of rural communities, low-income individuals, and small businesses that may not meet the stringent creditworthiness criteria of banks. This enables broader access to credit and promotes inclusive growth. 

Support for SMEs and Entrepreneurs: Small and medium-sized enterprises (SMEs) are vital to any economy, providing employment and driving innovation. However, SMEs often struggle to access credit from banks due to lack of collateral or insufficient credit histories. NBFCs help bridge this gap by offering flexible loan products tailored to the needs of small businesses, thus fostering entrepreneurship and job creation. 

Infrastructure Development: Many NBFCs specialize in financing large infrastructure projects such as roads, power plants, and telecommunications networks. These long-term investments are critical for a country’s development, and NBFCs play a complementary role to banks by providing the necessary capital and financial expertise. 

Capital Market Participation: NBFCs also facilitate the development of capital markets by investing in stocks, bonds, and other financial instruments. Their participation increases liquidity in the markets and encourages investments, further contributing to economic development. 

Diversification of Financial Services: By offering services like leasing, asset management, and hire purchase, NBFCs provide a range of financial products that complement traditional banking services. This diversification contributes to a more resilient financial system, as different sectors can rely on NBFCs for specialized financing needs. 

4. Explain the meaning of Financial Inclusion. Discuss the Government Initiatives for Financial Inclusion. 

Ans) Financial inclusion refers to the process of ensuring access to essential financial services, such as banking, credit, insurance, and payment systems, at affordable costs for all individuals and businesses, especially those traditionally underserved or excluded, such as low-income groups and rural populations. The primary goal of financial inclusion is to make formal financial systems more accessible to marginalized sections of society, enabling them to participate in the broader economy, save securely, and access credit when necessary. Financial inclusion is critical for promoting economic growth, reducing poverty, and fostering equitable development. 

In countries like India, where a significant portion of the population historically lacked access to formal financial services, financial inclusion plays a transformative role. It empowers individuals by enabling them to save, invest in education, access health services, and start small businesses. For businesses, it means access to credit and the ability to grow and contribute to the economy. Financial inclusion not only helps in reducing income inequality but also strengthens the overall financial system by expanding the customer base. 

Government Initiatives for Financial Inclusion in India: 

Recognizing the importance of financial inclusion for equitable economic growth, the Government of India, along with regulatory bodies like the Reserve Bank of India (RBI), has launched several initiatives to bring more people into the formal financial sector. 

Pradhan Mantri Jan Dhan Yojana (PMJDY): Launched in August 2014, PMJDY is one of the largest financial inclusion initiatives globally. Its primary objective is to provide universal access to banking services, particularly for those without bank accounts. Under this scheme, individuals can open zero-balance savings accounts with no minimum balance requirement. These accounts come with features such as a RuPay debit card, accidental insurance cover, and access to overdraft facilities. PMJDY has played a pivotal role in increasing financial penetration, with millions of previously unbanked individuals gaining access to formal banking services. 

Aadhaar-enabled Payment System (AePS): The Aadhaar-enabled Payment System (AePS) leverages India's biometric-based unique identification system, Aadhaar, to facilitate secure banking transactions. AePS allows people, especially in rural areas, to conduct transactions using their Aadhaar number and biometric authentication at micro ATMs or banking correspondents. This initiative has been instrumental in providing banking access to those in remote locations, thus enhancing financial inclusion. 

Direct Benefit Transfer (DBT): The government launched the Direct Benefit Transfer (DBT) scheme to ensure that welfare benefits are directly transferred to beneficiaries' bank accounts, reducing leakages and ensuring transparency. The DBT system has been integrated with the PMJDY accounts and Aadhaar, helping the poor and vulnerable access government subsidies and benefits, including scholarships, pensions, and agricultural subsidies. This direct deposit system reduces the reliance on intermediaries and ensures that government assistance reaches the intended beneficiaries effectively. 

MUDRA Scheme: The Pradhan Mantri Mudra Yojana (PMMY), introduced in 2015, aims to provide loans to micro and small enterprises, particularly those in non-corporate, non-farm sectors. Under this scheme, loans up to INR 10 lakh are provided without the need for collateral, thus encouraging entrepreneurship and supporting small businesses. MUDRA (Micro Units Development and Refinance Agency) loans are divided into three categories—Shishu, Kishor, and Tarun—based on the loan amount, catering to businesses at different stages of growth. By extending credit to micro-entrepreneurs, this scheme has significantly contributed to financial inclusion and job creation. 

Payment Banks and Small Finance Banks: To further promote financial inclusion, the RBI introduced payment banks and small finance banks. Payment banks, such as India Post Payments Bank and Airtel Payments Bank, are designed to offer basic banking services like savings accounts, remittance services, and mobile payments, but they cannot issue loans or credit cards. Small finance banks, like Ujjivan and Equitas, are permitted to offer a broader range of financial services, including lending, but with a focus on serving small borrowers and businesses. These specialized banks are crucial in extending banking services to underserved and unbanked regions. 

National Financial Literacy Mission: Financial literacy is a crucial aspect of financial inclusion. The RBI and government have initiated various financial literacy programs to educate people about financial services, the importance of savings, and how to use banking products effectively. The National Centre for Financial Education (NCFE) plays a central role in promoting financial literacy across the country, especially targeting rural areas, youth, and women. 

5. Write short notes on the following:- 

(a) Business Ethics 

Ans) Business Ethics refers to the principles and standards that guide behavior in the world of business. It involves applying moral values, ethical reasoning, and social responsibility to business decisions and actions. Business ethics governs how businesses operate, how they treat their employees, customers, suppliers, and the broader community, and how they balance the pursuit of profit with a commitment to ethical practices. 

At its core, business ethics focuses on doing what is right, fair, and just. This includes issues like honesty in advertising, fairness in employee treatment, transparency in financial reporting, and accountability for the social and environmental impact of business activities. Ethical businesses strive to build trust with stakeholders, which includes shareholders, employees, customers, and the communities in which they operate. 

Ethical behavior in business goes beyond simply following the law; it requires businesses to adhere to higher moral standards even when legal obligations are met. For instance, while it may be legal to cut costs by reducing the quality of products, it may not be ethical if it endangers consumer safety. 

In recent years, there has been a growing focus on corporate social responsibility (CSR) as part of business ethics, which emphasizes that businesses should contribute positively to society beyond making profits. This involves efforts to minimize environmental damage, support community development, and promote fair labor practices. 

Companies that maintain strong ethical standards are more likely to build long-term success, as ethical behavior fosters customer loyalty, improves employee morale, and strengthens brand reputation. Conversely, unethical practices can lead to legal penalties, financial losses, and damage to reputation, making business ethics essential for sustainable business practices. 

(b) Disclosure and Transparency 

Ans) Disclosure and Transparency are fundamental principles in corporate governance, essential for maintaining trust and confidence among stakeholders, including shareholders, regulators, employees, and the public. These principles require companies to provide accurate, timely, and comprehensive information about their operations, financial performance, risks, and other critical aspects of their business. 

Disclosure refers to the act of providing relevant information to stakeholders. This includes financial reports, management discussions, risk assessments, corporate strategies, executive compensations, and any material events that could impact the company’s performance or stock price. Financial disclosures, such as balance sheets, profit and loss statements, and cash flow reports, allow investors to assess a company's financial health and make informed decisions. Regulatory bodies like the Securities and Exchange Board of India (SEBI) in India mandate companies to follow specific disclosure norms to ensure all market participants have access to essential information. 

Transparency, on the other hand, refers to the openness and clarity with which a company communicates this information. It implies that the information provided is not misleading, incomplete, or difficult to access. Transparent companies go beyond the minimum regulatory requirements, offering clear, honest communication about their business practices, future prospects, and challenges. This builds trust among investors and other stakeholders, as they feel they are getting a true picture of the company’s operations and risks. 

The combined role of disclosure and transparency is to ensure accountability. When companies regularly disclose information transparently, they are more likely to be held accountable for their actions. This reduces the chances of fraud, corruption, or unethical behavior, contributing to the overall health and stability of financial markets. 

(c) Mutual Funds 

Ans) Mutual Funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, money market instruments, or other assets. Managed by professional fund managers, mutual funds provide individual investors with access to a diversified and professionally managed portfolio, which might be challenging to build individually due to cost or lack of expertise. 

One of the primary advantages of mutual funds is diversification. By investing in a wide range of securities, mutual funds reduce the risk associated with investing in individual assets. Even if one asset performs poorly, the impact on the overall portfolio is minimized due to the broad spectrum of investments. This diversification helps in spreading the risk and potentially increasing returns over time. 

Mutual funds come in various types, catering to different investor goals and risk profiles. Equity funds primarily invest in stocks and are suited for investors looking for higher returns with a higher risk. Debt funds invest in fixed-income instruments like bonds and are generally preferred by risk-averse investors looking for stable returns. Hybrid funds combine both equity and debt investments to balance risk and return, while money market funds focus on short-term, low-risk investments like Treasury bills for more conservative returns. 

Investors can buy mutual fund units at the fund’s Net Asset Value (NAV), which is the value per unit of the fund based on the total market value of its underlying assets. One significant advantage of mutual funds is their liquidity, as most open-ended funds allow investors to redeem their units at any time, ensuring easy access to their investments. 

Moreover, mutual funds offer professional management by experienced fund managers who make investment decisions based on market research, helping investors who may lack the knowledge or time to manage their portfolios actively. Additionally, mutual funds are regulated by entities like the Securities and Exchange Board of India (SEBI), which ensures transparency and investor protection.