"The nominee directors have a duty to act in the larger public interest," RBI deputy governor SP Talwar said while speaking at a seminar organised by the Administrative Staff College of India (ASCI) on `corporate governance in banking and finance'.

Listing out the objectives of corporate governance in banks and financial companies, Talwar said that they should focus on creating shareholder value and being more transparent in their operations. "If privatisation is to succeed in India, it becomes imperative that the institutions in the private sector, which manage public savings, act with integrity and adopt sound business practices," he said, adding that the apex bank has been withdrawing its nominees from the boards of well managed old private banks.

"Independant boards are essential to a soundgovernance structure, and this necessitates having independent chairman and an independent CEO for the banks --as recommended by the Cadbury Committee on corporate governance. This will ensures that no individual will have unfettered powers of decision," the apex bank deputy governor said.

Talwar added that `connected lending' --lending by banks to directors and the companies in which the directors are interested-- should not be permitted: "Banking Regulation Act does not permit this and similar regulations need to be introduced in the FIs too."

"Another issue on corporate governance relates to the number of non-executive directors and to professionalise the bank board of directors. Public sector banks currently have two whole time directors, including the CEO, and the rest are non-executive directors, employee directors and nominee directors. Cadbury committee has suggested that the board should include non-executive directors of sufficient caliber and number for their views to carry a significant weightin the board's decision," Tarapore said, adding that to ensure a balance in the composition of the board, it is necessary that at least thre or four directors --not exceeding one third of the total strength of the board-- should be executive directors.

The apex bank deputy governor added that RBI has appointed a working group to evolve objective criteria for urban banks, determine the need and potential for organising urban cooperative banks, review the existing entry point norms and the existing policy pertaining to branch licensing and area of operation of urban cooperative banks, to consider measures for determining the future set-up of weak/unlicensed banks, to examine the feasibility of introducing capital adequacy norms for urban cooperative banks and to suggest necessary legislative ammendmends to the Banking Regulation Act and the Cooperative Societies Act of various states for strengthening the urban banking movement.

"RBI has set up a high powered advisory group to undertake a study of theexisting system of deposit insurance and the need of certain reforms therein," Talwar said.