Report on Priority areas for Reforms of Corporate Governance in Indian Banking Sector - by Institute of Public Enterprise - Hyderabad - 2013

A Survey
(Executive Summary)

Though outcomes of good corporate governance remains same irrespective of nature of business, type of ownership, quality of management, business/legal regulations, and political environment, but the means to achieve this good governance differs a lot based on the factors mentioned above. Some of the parameters that may influence corporate governance include ownership structure, board philosophy, industry segment, maturity of business, management process, level of competition, international business participation, and size of the company.

Lot of effort is being put both nationally and internationally in understanding and suggesting good practices that can improve governance of banking sector. In India also several initiatives have been taken up in understanding nuances of banking sector governance.

The research team at IPE made an attempt to understand the linkages between ownership, governance and performance of banking sector in India. In this pursuit, the team gathered recommendations of few important reports like OECD principles, Dr. A. S. Ganguly Committee report and Basel recommendations on ownership structure and governance mechanisms of banking industry. In addition to this, data on various parameters coming under the category of ownership, governance and performance of banks was collected. Over and above, views of present and prospective board members of Indian banking sector on issues related to corporate governance in banking industry were collected through structured questioners. Based on this the following recommendations are being made.

Average board size of public sector banks stands at 13. From the empirical evidence it is found that larger boards are resulting in more NPAs. Even primary data collected from present and prospective board members indicates that smaller boards are effective. Even Dr. A. S. Gangully report is of the view that larger boards may miss the focus and hence more working director should be there in such cases. In view of this and in order to make the boards of public sector banks more effective it is recommended to prune down the board size.

The present level of executive directors in private sector banks is 3 per board. From this study it is found that more number of executive directors leading to better profits. Basel committee suggest that executive directors can be upto 75% of the elected board, while Dr. A. S. Gangully committee is of the opinion that given the complexity of board functioning more executive directors are preferred. In view of this we suggest that strength of executive directors in private sector banks need to be augmented further.

Most of the committees have talked about board independence and independent directors on the board. But empirical evidence is not suggesting any meaning correlation between quality of governance and presence of independent director on board. Even respondents in our primary data collection also felt the same way. However, we are of the opinion that contribution of Independent director on board cannot be underestimated and the present level of in effectiveness need to be understood from different dimensions. Keeping this in view, we would like to suggest that board independence and role of independent directors as one of the governance mechanisms need to be further strengthened and refined.

OECD principles and Dr.A.S. Gangully recommendations unanimously agree that chairman of the board should be non executive. Non-executive chairmen are expected to bring in better monitoring and more independence to the board functioning. But in India, around 22% of private sector bank boards and 16% public sector bank boards have non-executive chairman. Though we could not find a significant empirical evidence to suggest non-executive chairmen lead to better bank performance, we would like to suggest separation of leadership at board level, theoretically, may result in better monitoring and better performance.

Majority of the reports including OECD Principles have not mentioned anything about preferred shareholding pattern. Empirical evidence also not suggesting any pattern significantly. But keeping the theoretical advantages and disadvantages of concentrated shareholding in a competitive business environment we would like to suggest a balance approach towards shareholding pattern.

Similarly, no mention was made about preferred Foreign Institutional Investment (FIIs) and Domestic Institutional Investment (DIIs) by the above mentioned reports. However, the little empirical evidence is suggesting that FIIs and DIIs having inverse relationship with NPAs and perceived replacement value of private sector banks. With this input we would like to suggest that the role of FIIs and DIIs in banking sector need to be further strengthened so that these institutions can play a significant role in governance of banking industry.

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Comments / Suggestions / Inputs may please be forwarded to:

The Executive Director
National Foundation for Corporate Governance
E-mail : ed.nfcg@cii.in

Shalini Budathoki
Director (CII), NFCG
E-mail : shalini.budathoki@cii.in

 

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