What do you mean by Corporate Governance and explain how it plays an important role in banks?

Corporate Governance (CG) Corporate Governance (CG) means the system by which Companies are controlled. Corporate Governance in the context of banking denotes, managing the affairs of Banking Company by adopting the global best practices so as to protect the interest of all stakeholders such as depositors, other customers, investors, employees, regulatory authorities and society at large. Therefore the gamut of Corporate Governance is quite large and encompasses numerous aspects namely regulatory market, stakeholder and internal governance aspects. For a balanced performance of an economy, the country's economic and financial systems have to be stable. If any of these factors is found wanting there could be destabilization of the economy. Banks are back bone of the economy. Any failure of the governance factors will have its chain reaction on other sectors of the economy. Therefore banks must follow best governance practices that goes a long way in instilling confidence among all its stake holders. Hence good corporate governance practices are a pre-requisite for a robust banking system in the economy. On the contrary poor governance in the banking system can lead to bank failures and consequently erode the confidence of depositors and other stakeholders leading to run on banks thereby creating negative impact on the financial system both at national as well as international levels. In light of the aforesaid discussion and for the following reasons Corporate Governance becomes a crucial component for the banking sector: Any financial mishap be detrimental to the economy and to get back to normalcy it would take a long time which may impede growth plans. Banks are highly leveraged and this make them vulnerable to any adverse developments in the economy. Banks are highly trusted organizations that deal with funds of the public at large. Anything missed in their functions will result in loss of trust, leading eventually to the collapse of such institutions and also will have its contagion effect on the economy. Banks act as agents for transmission of the benefits of monetary policies to the public. They also play a vital role in payment and settlement system in an economy. Any weaknesses arising out of poor or inadequate monitoring can be set right with robust internal controls which are an essential part of governance. Therefore corporate governance in the banks is beneficial both for the banking sector as well as the economy.