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Corporate Governance in Banks in India
While several committees have examined and suggested ways to improve corporate governance in banks in India, this study makes an attempt to prepare a benchmark index for the board composition aspect of corporate governance. A comparison between the indices for public sector banks with private sector banks reveals that differences in governance structures cannot be explained fully in terms of ownership only. This is a welcome feature, as with some efforts on the part of the majority shareholder, corporate governance in all the banks can be brought on par with the best-performing bank, by ensuring greater compliance with corporate governance benchmarks.
The views expressed in the article are personal and do not represent the views of the authors’ institution.
The link between efficiency and good corporate governance has been in focus in recent times. Good corporate governance structures encourage companies to provide accountability and set in place control systems. A fundamental reason why corporate governance has moved onto the economic and political agenda worldwide has been the rapid growth in international capital markets. Effective corporate governance enhances access to external financing by firms, leading to greater investment, higher growth and employment. Investors look to place their funds where the standards of disclosure, of timely and accurate financial reporting, and of equal treatment of all shareholders are met. Good corporate governance improves the credibility of firms, mitigates discord between different stakeholders, reduces legal costs and improves management–labour relationships in the process.
India has a bank-based financial system and banks form the fulcrum of the financial system. While banks finance firms, they themselves need to be financed and have to attract investors. Given the predominance of banks and the significance of good corporate governance practices in enhancing the credibility of institutions, it is relevant to study corporate governance in banks in India. Against this backdrop, this study aims to analyse corporate governance in the major public sector banks (PSBs) and private sector banks (PVBs) in the country. This analysis is based on the computation of a benchmark index and the calculation of a corporate governance index on the basis of this benchmark index. Accordingly, the study is organised thus. The following section provides the genesis and tenets of corporate governance. Existing literature on corporate governance is briefly discussed thereafter. Further, the methodology for computing corporate governance index is discussed, following which are the details of index for PSBs and PVBs along with the validation and concluding observations.
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