Emerging Role of Corporate

Governance in Indian Banks

-Prof. Arti V. Modi
Asst. Prof, LLIM
 Introduction and meaning
• Governance, in general terms, means the
process of decision-making and the process by
which decisions are implemented (or not
implemented), involving multiple actors. Good
governance is one which is accountable,
transparent, responsive, equitable and
inclusive, effective and efficient, participatory
and which is consensus oriented and which
follows the rule of law”
 Need for corporate governance in
banks
• The need for corporate governance in the
banking sector emerges from the fact that
sound corporate governance is an important
element of bank safety and soundness and
the stability of the financial system.
• the failure of one bank can rapidly affect
another through inter-institutional exposures
and confidence effects
 Why corporate governance in banks
• The importance of corporate governance in banks as stated
by the Basel Committee has been expressed as
“[c]orporate governance for banking organizations is
arguably of greater importance than for other companies,
given the crucial financial intermediation role of banks in an
economy, the need to safeguard depositors‟ funds and
their high degree ofsensitivity to potential difficulties
arising from ineffective corporate governance. Effective
corporate governancepractices, on both a system-wide and
individual bank basis, are essential to achieving and
maintaining public trust and confidence in the banking
system, which are critical to the proper functioning of the
banking sector andeconomy as a whole” (Basel Committee
on Banking Supervision (2005) par. 8).
 Research question
• In the current paper a study is attempted to analyse
the relation between corporate governance and the
performance of the banking sector. For this purpose 8
banks have been taken for the study and they have
been examined for a period of 8 years from 2012-2017
on various aspects of corporate governance as
suggested by the Basel Committee viz. board structure
variables: size, composition, duality, committees,
meetings and other directorships. The data has been
acquired through annual reports and other secondary
sources and analysis using descriptive statistics and
correlation analysis.
 variables

• Dependent variable: Return on equity for the years 2010-2017 is

the dependent variable. This variable has been used to analyse the
financial performance of the banks
• Independent variable
• Board size: The first variable used for corporate governance is the
board size representing the total number of members on theboard
of the company
• Number of board meetings: the number of board meetings held in
the year has a relationship with the performance of the bank
• Independence of the director: the stake of the chairperson and
other top management professionals in the organization influence
the performance of the organisation
• Audit committee- the composition of the audit committee has a
direct impact on the performance of the banks
 objective
• The objective of the research is to study the
interdependence of the corporate governance
factors viz. size of the board, independence of
the directors, number of board meetings held
and the presence of audit committee on the
performance of the commercial banks.
 Model Specification

• The economic model used is given as:

• Y= β0 + β Fit + eit (1)
• Where, Y is the dependent variable viz ROE of the banks. β0
is constant, β is the coefficient of the explanatory variable
(corporate governance mechanisms), Fit is the independent
variable viz. the corporate governance factor influencing
the performance of te bank and eit is the error term
(assumed to have zero mean and independent across time
period).
• By adopting the economic model as in equation above
specifically to this study, we have analyzed the impact using
the equation below
• . ROE = β0 + β1BSIZE + β2BIND + β3BM + β4BACOM + eit (2)
 Results and findings
• The results above shows that Board Size has a positive and significant
impact on the performance of the banks. This implies that the size of the
banks would influence the decisions of the board and thus affecting the
performance of the banks
• Board independence has a positive correlation with the return on equity
which means that higher the independence greater would be the
performance of the banks. It was noted that in state owned nanks the level
of independence was higher than that in private banks
• The number of board meetings did not have a significant impact on the
performance of the banks. Those having higher number of meetings did
not show better performance than those with lesser nimber of meetings
• Although the number of members showed a positivite correlation with the
ROE however the relation was insignificant. This indicated that the number
of members in the audit committee thoug impacts the working of the bank
would not be significant in changing the performance levels of the banks
• Interpretation: The mean of ROE is 4.89 in the
said period.. The average board size is 7.86
with a standard deviation of 0.8 and it ranges
8 to 15 members. The average independent
directors are 54% with standard deviation
0.87. This indicates that in general there is
more than overage independence level in
most of the banks. A majority of the firms
(78%) have audit committee of comprising of
1 to 15 members.
Conclusion and recommendations