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The process of liberalization, globalization and opening up the contours of national economies began in the early nineties in many countries including India. The banking industry has been all along responding to such changes. Banks have adopted several strategies to change their policies and processes to ensure that they remain fundamentally strong and manage the reforms related to changes effectively. Millions of depositors keep their hard earned money in banks with the utmost good faith that stability of principal will be ensured. In order to protect the interest of depositors', strict governance mechanism has to be followed in banking sector. The present study is explanatory and empirical research in nature and an attempt to understand the conceptual framework, to analyze the corporate governance practices on the basis of their free float market capitalization listed in the BANKEX [BSE] as on 31st March 2016 followed by some selected public and private sector banks. It also focuses on interdependence of board size, proportion of executive directors in the board, net profit earned, net non-performing asset accumulated and capital adequacy ratio in Indian banks.
According to Confederation of Indian Industries (CII),
'Corporate Governance occupies mind space of the government,
regulators, corporate, boards, markets, employees and investors
- almost the entire society - as one of the most important business
constituents given its all-pervasive characteristic'. The
corporate governance mechanism is much more crucial in
the banking sector due to multifold reasons. Banks serve a
crucial link in the nation's financial system, banks are
highly leveraged as they accept large amount of
uncollateralized public funds as deposits in a fiduciary
capacity and further leverage those funds through credit
creation. Apart from these, banks provide access to
payment systems and a variety of retail financial services
for the economy at large. Interrelatedness of transactions
makes the risk of contagion a reality and consistently poor
decisions by one bank can create serious troubles for other
banks. Banks, more than other corporate have to match
the conflicting interests of different stakeholders.
Modern banking was introduced in India during British regime with the concept of unlimited liability. General Bank of India was started in 1787 to act as banker of the Government.Bank of Hindusthan was founded in 1771 in Calcutta. Joint stock of banking came into existence in 1860 with limited liability. Seven banks were set up during 1870-1894 with the feature of limited liability clause. Swadesi movement in 1905 gave up a fill up to indegeneous banks and during 1906-1913, 5 big banks and several small banks came into existance. The four big banks were - Bank of Baroda, Mysore Bank, Indian Bank and Bank of India (Pathak, 2007). During World war-I and earlier to that nearly 54 small banks failed and nearly 34% paid up capital of banking sector was lost. By the end of 1923, total number of bank failures was 143. From the beginning of 20th century banking has been so developed that in fact, has come to be called 'life blood' of trade and commerce (Munjal, 1990). During the post-independence era, the increasing tempo of economic activity led to the expansion of scope and direction of banking at a rapid pace (Naruala, 1992).
Ghosh (2005), highlighted that the linkage between the financial condition of the corporate and banking sector asset quality is modelled at the aggregate level. The asset quality of banks is a function of corporate leverage and a set of control variables. Mahapatra (2012) said that Indian banks will have high common equity capital ratio and it will prove to be a good thing for the Indian banks. More than 50% of the Indian banks have a common equity capital ratio of more than 8% and hence these can implement Basel III even today. Since the Government is holding high stake in the PSUs banks, the dependency of these banks on Government for capital support will go up. Roy (2013) opined that Indian banks have a high capital adequacy as of now and therefore they may not need any additional capital till 2015. But after that, when the capital requirements will increase because of the countercyclical buffer requirements, it would be difficult for the public sector banks to raise money. It will increase the borrowings of the government and will negatively affect the fiscal deficit. Hence the date of implementing the common equity for the public sector banks should be delayed for 2-3 years to cope with the increasing burden on Government. Saibaba (2013) indicated that in the Indian context, the firms with large board size have better valuation. Perhaps the justification needing a larger board size in Indian context is that SEBI's clause 49 of the listing agreement has both mandatory and voluntary requirements for the formation of different committees such as audit committee, nomination committee etc. Larger board size may minimize the overlapping of functions. Satpathy, Behera and Digal (2015) discussed that NPAs in the Indian banking sector have been on rise significantly which is a cause for serious concern for the policymakers, particularly the Government and the RBI.
The objectives of the proposed study are as follows -
The proposed study is explanatory and empirical in nature and the sources of data are secondary data(inclusive of quantitative and qualitative data) which are collected through websites and annual reports related matter.
The corporate world in general is following a relentless march towards better corporate governance standards and adoption of uniform accounting standards and disclosure requirements. These twin requirements are particularly relevant to the banking sector where depositors' funds are many times higher than the equity of promoters. For effective governance, it has to be ensured that the conflicts of interest between the stakeholders are mitigated. Proper governance has emerged as an important benchmark for improving competitiveness and enhancing efficiency and thus improving investors' confidence and accessing capital , both domestic as well as foreign. Banks operate on trust and the funds they receive from depositors are on the basis of trust. Last but not the least, in case of public sector banks the importance of governance is further magnified because of their large share of the banking business and also because of the fact that they are government owned entities (Kamath, 2014).
According to the guidelines made by the Security
Exchange of India (SEBI), all listed companies have to
conform to the SEBI clause 49. The Board of Directors of
the company shall have an optimum combination of
Executive and Non-Executive Directors. If the board has a
non-executive chairman, at least one third of the total
number of directors on the board of the company shall
comprise independent directors. If the board has an
executive chairman, at least 50% of the total number of
directors shall comprise of independent directors. All the
listed banks whether PSU or private has to conform to this
guideline. According to listing requirement as per SEBI
clause 49, banks have to mention properly about their risk
management strategies in their corporate governance
report. Banks have to mandatorily maintain certain
minimum capital adequacy ratio as prescribed by
International Basel Norms. As per the Basel III guidelines,
banks have to maintain at least 10.5 % capital adequacy
ratio where the RBI has instructed all Indian banks to
maintain at least 11.5% capital adequacy ratio. Out of that
11.5%, Tier – II capitals should not exceed more than 2%.
The accumulation of Non-Performing Assets (NPA) has
become a major threat for Indian banking sector players.
Initially banks try to restructure their bad loans thorough the Corporate Debt Restructuring (CDR) cell. Banks usually offer lenient conditions such as reduction of interest rate, increase in the time period for repayment so that debtors can repay their loan. In spite of that if situation does not improve banks usually write off the bad loans or sell the same to Asset Reconstruction Companies (ARCs). The details of the selected PSU and private banks are provided in Table 4 below such as board size of bank, number of executive directors in the board, proportion of the executive directors in bank's board, net profit, capital adequacy ratio maintained as well as gross and net NPA as on 31st March,2016.
In order to ensure sound corporate governance, chairman
and CEO should not be same individual. Apart from State
Bank of India and Punjab National Bank, all other banks
have implemented Chairman and CEO Duality. The
correlation coefficient between PSU board size and net
profit is 0.9774. The correlation coefficient between the
private bank board size and net profit is 0.5967. Hence
large board size facilitates to boost up the performance of
the bank. The correlation coefficient between proportion
of dependent directors in PSU board and net profit is -
0.4185. It implies more executive directors in the board
reduce the efficiency of the PSU banks. On the contrary,
the correlation coefficient between the proportion of
dependent directors in the board of private banks and net
profit is 0.5219. It shows more number of executive
directors do not reduce the efficiency of the private bank.
Initially it seems that the results are contradictory though
the same can be logically substantiated. Lack of red tape,
lesser bureaucratic hassles as well as minimum political
intervention in recruitment have provided the private
banks more edge with respect to its PSU peers. Managerial
efficiency, dynamism as well as professional experience
are taken into consideration during the recruitment of
executive directors of private banks.
Correlation coefficient between PSUs board size and capital adequacy ratio is 0.3076. Correlation coefficient between private board size and capital adequacy ratio is 0.4895. It implies larger the board size, banks are in a position to maintain higher amount of capital adequacy ratio irrespective of the fact whether it is a PSUs or private. Correlation coefficient between proportion of executive directors in PSUs bank and capital adequacy ratio is - 0.7382. Correlation coefficient between proportion of executive directors in private banks and capital adequacy ratio is 0.3294. It implies proportion of executive directors in the board of PSU bank and capital adequacy ratio are inversely related. So PSUs banks having higher proportion of non-executive/independent directors will have more likelihood of maintaining higher capital adequacy ratio. On the contrary, the degree of association between proportion of executive directors in the board of private banks and capital adequacy ratio is comparatively low. Correlation coefficient between proportion of executive directors in PSUs banks and Net NPA is 0.913. Correlation coefficient between proportion of executive directors in Private Banks and Net NPA is 0.7559. Hence it can be said that there is a strong degree of association between proportion of executive directors and Net NPA of the bank irrespective of the fact whether it is a PSUs or private. For PSUs banks, correlation coefficient is almost close to one. Since PSUs banks are not driven by profit motive like their private and foreign peers, often they don't exert their full effort to recover their NPAs. Few cases loans are sanctioned due to political compulsion in spite of knowing the fact that borrowers are not creditworthy enough to repay the loan. More non-executive directors and independent directors in the board can reduce the net NPA of the banks.
It can be concluded from the study that large board size is preferable for good governance in banks. More and more non-executive and independent directors in the board are preferable as the same will help to reduce the NPA of the bank. The purpose of effective corporate governance will be fulfilled only when independent directors will act independently in true sense and utilize their personal and professional integrity as well as professional skepticism to the fullest extent to facilitate decision making process at the board level of the banks.