The last worldwide economic crisis in 2008 was supposed to have been triggered by the free-wheeling liberalisation of rules and regulations governing American banks and financial institutions by Alan Greenspan, the then President of the Federal Reserve.

Following the collapse of Lehman Brothers and in order to prevent a domino effect, the US government had to mount a massive rescue operation, which gave rise to the term, “too big to fail”. It has now become a phrase in banking vocabulary. The other related event was the role of the statutory auditor and the failure of Enron in 2005.

These are issues which remain, to this day, not fully resolved. However, the 2008 crises did lead to the creation of the G20 and the establishment of the Basel Protocol and the Bank of International Settlement. Over time, board governance and accountability have improved significantly, especially in the OECD countries.

Banks operating in India are required to follow rules and regulations, defined in India’s Banking Regulations Act, under the overall supervision of the Reserve Bank of India. Over the years, the proliferation of rural bank branches and cooperative banks have made control and supervisory complexities in India very challenging. Increasing instances of scams and defaults are measures of inadequate governance and accountability of statutory bank boards.

During the last decade, there has been a number of official reports and recommendations to improve governance in banks and to define more sharply individual and collective accountability as well as performance of board members. However, not much is known about the state of progress in these areas.

The Bankruptcy Act is possibly the most significant progress which acknowledges the realities of the marketplace and well-known ways to deal with these. However, until board governance, statutory audit and performance evaluation of boards are professionally formalised and implemented, genuinely meaningful improvement in India’s banking sector will remain elusive.

Banks in India may not be “too big to fail”, but they are “too economically and socially critical to fail”.