Corporate Governance, Board Characteristics and Performance of Indian Banks: An Empirical Study

Abstract

The paper examines the corporate governance, board characteristics, performance and asset quality of Indian banks and investigates the impact of a set of board characteristics on performance and asset quality of banks. We use a sample of 34 scheduled commercial banks, for ten years from 2009 to 2018, accounting for about 90% of the total banking assets and banking business India. We measure bank performance by return on assets (ROA) and asset quality of banks by ratio of net non-performing assets (NNPA) and document evidence on the role of the board characteristics on performance and asset quality of banks. The study finds that the board size and percentage of independent directors have significantly positive impact on ROA. The percentage of executive directors is having significantly negative relationship with the ROA. The board size and percentage of independent directors have significantly negative relationship with banks' NNPAs. The research suggests that the board of directors play a significant role in bank governance in India. The paper contributes to the literature on the corporate governance of banks in India, which is one of the emerging economies of the world. The research results provide some insights of corporate governance to the RBI for considering appropriate policy guidelines on corporate governance to banking industry in India.

Corporate governance determinants of asset quality in an emerging economy: evidence from Indian banks

“…The study by Mayur and Saravanan (2017) is on a limited sample and does not give insight into the specific identification of corporate governance factors. Bezawada and Adavelli (2020) do not consider the persistent nature of NPA and thus ignore the endogeneity issue, which renders the results unreliable.…”

“…Many authors, such as Umar and Sun (2018), Amuakwa-mensah et al (2017), Beck et al (2015), Prasanna et al (2014) and Louzis et al (2012), have studied the first two categories. However, limited studies assess the impact of corporate governance on asset quality, some of which are Bezawada and Adavelli (2020), Tarchouna et al (2017) and Meeker and Gray (1987). We intend to identify the key corporate governance determinants of asset quality of Indian commercial banks using novel data from 2010 to 2019.…”

“…Unlike earlier studies, we control both macroeconomic (systematic) and bank-specific (idiosyncratic) factors. Moreover, studies on India by Bezawada and Adavelli (2020) and Satpathy et al (2015) have also ignored the persistent nature of NPAs, thereby creating the issue of endogeneity. The persistent nature of NPA is captured by including its lag as a regressor by many studies such as Fajar and Umanto (2019), Beck et al (2015) and Louzis et al (2012).…”

“…Literature review BCBS (Basel Committee on Banking Supervision, 2015, p. 1) defines corporate governance as "A set of relationships between a company's management, its board, its shareholders and other stakeholders which provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance". Despite the importance of corporate governance, studies estimating the effect of corporate governance factors on NPAs in India are rare, with some exceptions, such as Bezawada and Adavelli (2020) and Mayur and Saravanan (2017). An article by Mayur and Saravanan (2017) studies 40 Indian banks from 2008 to 2012.…”

“…Several factors are essential components of the corporate governance framework. Some of the common factors in academic research are board size (Bezawada and Adavelli, 2020;Fern and Luna, 2020;Tarchouna et al, 2017;John et al, 2016;Liang et al, 2013), females in the board (Owen and Temesvary, 2018;de Haan and Vlahu, 2016;Liang et al, 2013), chief executive officer (CEO) duality (Faleye and Krishnan, 2017;Tarchouna et al, 2017;Liang et al, 2013), ownership concentration (Tarchouna et al, 2017;de Haan and Vlahu, 2016;John et al, 2016), board meeting (Bezawada and Adavelli, 2020;Fern and Luna, 2020;Andres and Vallelado, 2008) and board independence (Saada, 2018;Tarchouna et al, 2017;John et al, 2016;Liang et al, 2013).…”