summary of findings and suggestions -...
TRANSCRIPT
In this chapter an earnest attempt is made to summarise the.conclusions
hither to drawn in the course of discuisions made earlier on various aspects of
corporate governance in banking system. It aims at bringing together all the
inferences drawn by way of summing up the relevant observations made hither to in
the previous chapters in the course of the study. The conclusions were drawn on
various aspects of corporate governance practices in .banking sector which are
presented in the preceding chapters. Based on these conclusions arrived at, an
appropriate suggestions were also offered to tone up the performance of the banks
through effective implementation of corporate governance principles. The efforts
were made in this chapter to strengthen the Banking Sector through good and
universally acceptable Corporate Governance Practices in India in particular md
other counterparts in general.
A banking institution is indispensable to a modern society. It occupies an
important place in a nation's economy and plays a pivotal role in the economic
development of a country. It forms that core of the money market in an advanced
country.
In India, the question of Corporate Governance has come up mainly in the
wake of economic liberalization and de-regularization of industry and business. In
the process of economic stabilization and to strengthen fwther, India launched a
series of economic reforms in 1991, in response to a severe balance of payments
crisis and other economic destabilization on the global front, many of which directly
or indirectly led to a substantial liberalization of the corporate sector.
Corporate govemance is particularly important for banks, given the bank's
important role in the financial sector. The rapid changes brought about by
globalization, deregulation and technological advances are increasing risks in the
banking systems. Moreover, unlike other companies, most of the funds used by
banks to conduct their business belong to their creditors, in particular their
depositors. Linked to this is the fact that the failure of a bank affects not only its own
stakeholders, but may have a systemic impact on the stability of other banks.
Theoretically, information asymmetry gives rise to agency problems and conflicts of
interest between owners and managers. ~ ~ o d corporate governance is designed to
240
addreps this problem. Further, government regulations and frequent interventions
reduce the incentive for effective monitoring and, at the same time, make
supervision (or supervisors) less effective. In this context, the corporate governance
of banks becomes a more important challenge as compared to other firms.
India should have the high quality institutions necessary to sustain its
impressive current growth rates in tht: yem to wme, if the same trend is to be
maintahed. 'l'%e coqxm-ite sector in India could not remain indifferent to the
developmats that were taking place in the UK, which had a tremendous influence
on India too. They triggered off the t h i i g process on wrporate governance in the
country, which finally led to the government and regulators laying down the ground
rules on it. As a result of the interest generated in the corporate sector by the
Cadbury Committee's report, the issue of corporate governance was studied in depth
and dealt with by the Confederation of Indian Industry (CII), the Associated
Chambers of Commerce and the Securities and Exchange Board of India (SEBI).
Though some of the studies on the subject did touch upon the shareholders' right to
"vote by ballot" and a few other issues of general nature, none can claim to be wider
than the Cadbury Report. Prominent among them are: Working Group on the
Companies Act (1 996), Kurnar Mangalam Birla Committee (1 999), Naresh Chandra
Committee (2002), The SEBI's Follow-up on Birla Committee (2002), Narayana
Murthy Committee (2003) and J. J. Irani Committee on Company Law (2005) and
Corporate Governance Voluntary Guidelines 2009.
In India, the four clusters of legal arrangements have been developed to
respond to corporate governance problems. These are securities market regulations,
the fiduciary responsibilities of directors and officers, laws governing takeovers and
rules governing shareholder voice. The two most important laws that control the
listed companies are the Securities Contracts (Regulation) Act, 1956 which regulate
all new public offerings, dealings in stock market and the functioning of the stock
exchanges in India and the Securities and Exchange Board of India Act, 1992 which
created the Securities and Exchange Board of India (SEBI), giving it the authority to
administer the Securities Contracts (Regulation) Act and all the other regulation of
securities. The major purpose of these laws is to require regular, accurate, and timely
public disclosure of financial information by any company that issued publicly
traded securities and to instill public mnfidence in the reliability and axumcy of
information so reported. A new law call'ed the Indian Competition Ad, 2002
been enacted to replace the MRTP Act, 1969. The objective of the new law is to
prevent practices having adverse effect on Ampetition, to promote and sustain
competition in markets, to protect the interest of consumers and to ensure freedom
of trade carried on by other participants in markets and for matters connected
therewith or incidental thereto.
Corporate Governance is aimed at ensuring proper governance of business as
well as complying with all the governance noms prescribed by regulatory board for
the benefit of all interested parties including society. The basic objective is the
maximization of long-term shareholders value within the parameters of public law
and social ethics to give an impression to customers and employees about the
transparency and fairness of business.
Corporate Governance has fast emerged as a benchmark for judging
corporate excellence in the context of national and international business practices.
From guidelines and desirable code of conduct some decades ago, corporate
governance has come a long way and is now recognized as a paradigm for
improving competitiveness and enhancing efficiency, and thus improving investors'
confidence and accessing capital, both domestic as well as foreign. The framework
for corporate governance is not only an important component affecting the long-term
prosperity of companies, but it is a leading species of a large genus namely, National
Governance, Human Governance, Societal ~overnance,. Economic Governance and
Political Governance. Government provides necessary conditions, framework and
environment to the corporate to operate. There is, however, no universal recipe for
good corporate governance since business environment varies fiom country to
country.
Corporate Governance is, therefore, a systematic approach where the
connected members, management and employees are expected to cooperate in the
decision making process of the company. Based on some fundamental reasons,
corporate governance holds its premise that the business should be conducted by the
desires of shareholders. It identifies the distribution of rights and responsibilities
among a variety of stakeholders in the company. It also briefly outlines h e structure
and process for judgment on matters relaied to the company dealings. In the context
of the above, the following are the broad objectives on which caporate governance
can be measured: i) Suggested model code okbest practices, ii) Prefnred internal
systems, iii) Recommended disclosure requirements, iv) Board members' role, V)
Independent director, vi) Key information to the board/committee, vii) Committees
of board, viii) Policies to be established by the board and ix) Monitoring
performance.
Effective corporate governance is important for any company to be
successll irrespective of the type of business it does. Corporate governance has, of
course, been an important subject of discussion since many years. Scholars and
researchers from finance fields have actively investigated the importance and
efficacy of corporate governance for at least a quarter of a century. There have been
intense debates and brainstorming over corporate governance practices particularly
in the developed nations. However, the effectiveness of corporate governance
practices in the developed nations tells an ironic story from the CG practices point of
view. The volume of scandals and lack of transparency in governance in the
developed nations nullifies its true commitment to governance practices compared to
the developing world. Therefore, much prior to the recent wave of corporate fiauds
in developed economies, corporate governance has been a fundamental subject in
emerging economies.
Banking sector being the dominant and vital segment deserves the utmost
attention. Banking is the systemic institution that not only possesses the potential of
a great catalyst for growth but also, on the other hand, has the capability of causing
calamity to an economy. There is considerable deviation in practices of corporate
governance being followed by the banks in India. When banks efficiently mobilize
and allocate funds, this lowers the cost of capital to firms, boosts capital formation,
and stimulates productivity growth. Thus, the functioning of banks has ramifications
for the operations of firms and the prosperity of nations.
Corporate Governance as the set of mechanisms - both institutional and
market-based - that induce the self-interested controllers of a company (those that
make decisions regarding how the company will be operated) to make decisions that
maximize the value of the company to its owners (the suppliers of capital). Or, to put
it another way: "Corporate governance deals with the ways in which suppliers of
finance to corporations assure themselves of getting a return on their investment."
'The governance mechanisms that have been most extensively studied in the
US can be broadly characterized as being either internal or external to the firm. The
internal mechanisms of primary interest are the board of directors and the equity
ownership structure of the firm. The primary external mechanisms are the external
market for corporate control (the takeover market) and the 1egaVreguIatory system.
In India, a strident demand for evolving a code of good practices by the
corporates themselves is emerging. In the global perspective, it may constitute a
necessity to cut through the maze of prevalent questionable practices, indefensible
management attitudes to stakeholders and penetrable non-disclosures. The initiatives
taken by the Government in 1991, aimed at economic liberalization and
globalization of the domestic economy, led India to initiate reform process in order
to suitably respond to the developments taking place the world over. On account of
the interest generated by Cadbury Committee Report, the Confederation of Indian
Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM)
and, the Securities and Exchange Board of India (SEBI) constituted Committees to
recommend framework for good Corporate Governance. An examination of
practices of accounting standards, and their issues in Indian industry may help to
understand the existing practices of accounting standards, which in turn help in
designing the effective standard practices so as to ensure good Corporate
Governance. In this context, an attempt is made here to examine the accounting
standards and their practices in India, with a view to strengthen the accounting
standards and improve their practices for good Corporate Governance.
There have been several major corporate governance initiatives launched in
India since the mid-1990s. The first was by the Confederation of Indian Industry
(CII), India's largest industry and business association, which came up with the first
voluntary code of corporate governance in 1998. The second was by the SEBI, now
enshrined as Clause 49 of the listing agrekent. The third was by the Naresh
Chandra Committee, which submitted its report in 2002. The fourth was again by
SEBI the Narayana Murthy Committee, which also submitted its report in 2002.
Based on some of the recommendations of this committee, SEBI revised Clause 49
of the listing agreement in August 2003. Subs~umtly, SEBI withdrew the revised
Clause 49 in December 2003, and currently, the original Clause 49 is in force. But
the corporate governance reforms in India are at a crossroads now; while corporate
governance codes have been drafted with a deep understanding of the governance
standards around the world, there is still a need to focus on developing more
appropriate solutions that would evolve frop within and, therefore, address the
India-specific challenges more efficiently.
Above attempts made by the various regulating bodies show a rising level of
concan for the manner in which the corporate manage themselves and their geo
political environment. As more and more multi nationals chip in to utilize cheap
Indian labors - the regulating bodies will not have the only onus of task building,
but will also have to ensure means to implement the regulations. Not only this, as
more and more stakeholders make an attempt to maximize their profits, the investors
(especially the smaller ) will have to be wary of the crafty speculators who can ruin
the market confidence and decimate them. Investor training, therefore, is an
important area of immediate action. Organizations cannot create long term value
without having appropriate corporate governance policies in place, as the need of the
hour is to not only manage earnings, but also to create value. It becomes of utmost
importance especially for a country like India, as it 'comprises the various odd
sections of the society that are yet to realize the value of information to small
investors. Moreover, with the change in the context there is also a need to evolve the
governance policies suiting the geo political, social and economic environment of
that state.
In the last few years the thinking on the topic in India has gradually
crystallized into the development of norms for listed companies. The problem for
private companies, that form a vast majority of Indian corporate entities, remains
largely unaddressed. The agency problem is likely to be less marked there as
ownership and control are generally ngt separated. Minority shareholder
exploitation, however, can very well be an important issue in many cases,
belopment of norms and guidelines are an important first step in a serious
effort to improve corporate governance. ' h e bigger challenge in India, however, lies
in the proper implementation of those rules at the ground level. More and more, it
appears that outside agencies like analysts and stock markets @articularly foreign
markets for companies making GDR issues) have the most influence on the actions
of managers in the leading companies of the country. Buf their influence is restricted
to the few top (albeit largest) companies. More needs to be done to ensure adequate
corporate governance in the average Indian company. Even the most prudent norms
can be hoodwinked in a system plagued with widespread corruption. Nevertheless,
with industry organizations and chambers of commerce themselves pushing for an
improved corporate governance system, the future of corporate governance in India
promises to be distinctly better than in the past.
Internationally, the issue of corporate governance for banks has been
recognized as one of the most important issues of the corporate sector. The OECD
has produced a set of corporate governance principles that have become the core
template for assessing a country's corporate governance arrangements. Similarly, the
Base1 Committee on Banking Supervision has made recommendations for the
corporate governance of banks. Following the recommendations of the Base1
Committee, OECD and the IMF, many developed countries have designed policies
to implement best practices for bank management. Developing countries, especially
emerging economies in the South Asian region, followed the same recommendations
and introduced certain guidelines for corporate governance. In India (as well as other
South Asian countries), the banking sector restructuring took place only in the early
1990s and some steps towards good governance were initiated in late 1990s and
early 2000. As such, not enough time has passed to conduct a meaningful
assessment of the impact of these policies on bank efficiency.
The main banking sector reforms were implemented during 1992-94. The
aims of these reforms were to introduce greater transparency, to improve investor
protection, to enhance efficiency, to improve competition and to upgrade the
standards of customer service. The liberalization that started in India about thirteen
years ago has led to far-reaching changes in the financial structure. At present, India
has 53 private-sector banks, which represent about one third of all banking activities.
The k m v e Bank of India (RBI) supervises all of the above-mentioned
institutions and markets. It has direct responsibility for the l i m i n g and supvision
of financial institutions and more generally the responsibility for the smooth
functioning of the entire financial system. In ;he pre-refbm years of 1949-88, the
RBI played a critical role in implementing policies to support the diversion of
financial resources to the central government in order to carry out targeted credit
programmes to expand industrial capacity and agricultural outputs. Nowadays, the
RBI is more concerned with the deregulation of the financial sector, although
retaining responsibility for overall macroeconomic stability. All banks are now
required to extend credit to priority sectors, namely agriculture, small-scale
industries and small businesses, at concessionary interest rates. Up until 1990, this
directive applied to only the public sector banks but with deregulation this rule has
been extended to the private sector banks as an 'advisory' guideline. In addition, 1
per cent of credits are required to be made to certain sections (the scheduled caste
persons) of the community at a concessionary interest rate.
The governrnent-owned banks, which still dominate the banking sector, are
now under pressure to improve operational efficiency to compete with new entrants
and now face increased scrutiny in relation to prudential norms. More private banks
are now being licensed to increase competition in order to improve customer service.
To sum up, India has been able to significantly reform its banking sector, which is
essential to sustainable growth. However, with more active public and private
banking sectors in place, there is a need to implement some "self- discipline"
measures, or corporate governance guidelines.
In common practices, depositors rely on the government role in protecting
their bank deposits from exprop.riating management. It might encourage economic
agents to deposit their funds into banks because a substantial part of the moral
hazard cost is guaranteed by the government. In other words, even if the government
may explicitly provide deposit insurance, bank managers probably still have an
incentive to opportunistically increase taking risk. In case of any risk to deposits
government will bear risk in the form of insurance. This moral hazard problem can
be overcome through the use of economic regulations such as asset restrictions,
interest rate ceilings, reserve requirement$, and separation of commercial banking
from ~ ~ ~ c e and investment banking. The effects of these regulatiws limit the
Bbility of bank managers to ova-issue'liobilities or divat assets into high-risk
ventures.
n ~ , the special nature of banking requires not only a broader view of
corporate governance but also government intervention through regulation and
supervision in order to restrain the expropriating management behavior in banking
sector. In this view, managers and owners are subject to the regulation. In general,
the literature on bank regulation emphasises the stated purpose of regulation as that
of maintaining the integrity of the market system. Recent attention is more focused
on the role of government in the financial sector; government's participation as the
owner of financial intermediaries, government's intervention in pricing and
allocating credit, and government's role in regulating and supervising financial
intermediaries. Regulation is commonly associated with the resolution of market
failure in provision of the public good of financial stability. The characteristic
limitations imposed are not concerned with market structure. (for examples barriers
to entry or power of market monopoly). Instead, the constraints imposed by bank
regulators in many countries attempt the opposite action.
In developing countries the central bank plays a bigger role in the economy
and cannot reasonably be expected to have a total hands-off approach or be totally
independent of government; it has to nurture hand-hold and actively manage many
aspects of the economy. To that extent a central bank in a developing country plays
both a traditional and a non-traditional role that includes building independent
institutions such as capital markets, sector regulators, watchdogs, etc. and plays both
a regulatory and a development role. Central banking hct ions in India are carried
out by the Reserve Bank of India since independence by taking over the erstwhile
Imperial Bank of India formed in 1935. RBI was originally set up to regulate the
issue of currency, maintain foreign exchange reserves to enable monetary stability
and generally to operate currency and credit system in the country. As the economy
progressed, RBI's role underwent several shifts. For instance, when India followed a
control rnodel of economic governance, RBI's monetary policy was focussed on
allocating resources to various sectors and maintaining price stability. A novel
mandate of RBI in its early stages was to finance five year plans, establishing
specialis4 institutions to promote savings and to meet the credit needs of the
priority sector.
RBI has been largely ~uccessfkl in its objectives of growth with stability,
developing India's 'banking and haxicia1 sector and ensuring evolution of
wmpctitive mark-. Inevitably, because of the liberalisation process, Indian
banking sector is subject to greater shocks from external sources; for instance, a
market-based exchange rate system has integrated the Indian economy into the
global economy but the exchange rate has become more yolatile.
The supervisory Process in some countries is getting close to this issue when
supervisors examine the systems that banks have in place for managing their risk.
We suspect that as important as risk management is as a process, the incentives
inside the individual banks for taking risk will determine the efficacy of any
processes that are written down. Propose, as an adjunct to the standard Anglo-
American model of corporate governance, an expanded set of fiduciary duties for the
bank corporate officers and directors, stimulated perhaps by the creation of long-
tenn stakeholders that characterizes the so-called Franco-German model. Certainly,
the threat of legal recourse for those who suffer losses when directors do not fulfill
their fiduciary duties would improve the incentives for this group, and it might also
encourage them to support reforms in compensation policies for senior bank
officers.
To improve corporate governance of financial intermediaries, policy makers
must seek to enhance the ability and incentives of creditors and other market
participants to monitor banks.
Recently, subordinated debt proposals have received increased attention. The
above arguments apply to nonbank financial intermediaries. Fortunately, pension
funds and insurance companies are less subject to runs and generally have been
smaller in developing countries.'Till now, in emerging markets they generally have
had far less assets under their control than banks, but it is likely that this will change.
Insurance products generally show a high income elasticity of demand and the
lowering of population growth rates and flattening of demographic pramids may
heighten interest in funded pension systems, so attention to their better governance is
timely. Gathering more and better data on these branches of finance accordingly
should be a priority, for if they follow the experience of high income countries, their
assets will soon dwarf those of banks. Keeping in view all the above, a careful study
about the corporate governance has be& c&ed out and the findings have been
made in the following paragraphs followed by due suggestions.
Findings of the Study
The following are the main findings of the present study
Board of Directors of SBI
It is observed that horn 2005-07 the SBI maintained 70% independent
directors, but from 2008 to 2012 the bank has been gradually decreasing the
independent directors to 66% in the board. And also the SBI had furnished all the
information about all the directors.
In the year 2007-08 the company board had met 11 times. With regards to
these meetings the bank does not disclose any information related to those who
attended the meeting and also the bank does not disclose board members names for
that particular year.
Audit Committee of SBI
The company has complied with the conditions of the Clause 49 of the
Listing Agreement. It is observed that in some of the years it did not fiunish the
details to audit committee directors. The SBI has disclosed the details of the board of
directors like the number of meetings attended by the directors, their tenure etc,. The
bank has not disclosed any information relating to the corporate governance report
on audit committee.
Risk Management Committee of SBI
It is found that the bank has constituted risk management committee on
March 2004 onwards, but in the year 2007-08 the committee had 3 directors in the
board. In the year 201 1 - 12 the committee had 9 directors in the board but out of 9,
only 7 directors had met in the board meetings. The SBI has not disclosed the
information related to board meetings and what decision the committee has taken
relating to risk.
Remuneration committee of SBI
The SBI constituted remuneration cowittee on March 2007. From 2008-12
the bank disclosed only the number of board of directors in the board, but the bank
did not disclose about remuneration cornmitt& cha-ter. How many meetings the
bank conducted, who attended etc, but in the year 2009-10 the bank disclosed the
details of directors joining dates and their remuneration: And it is observed that the
bank disclosed about remuneration to be paid for attending each meeting to non-
executive directors.
Shareholders / Investors Grievances Committee of SBI
It is found that the Bank had furnished details of only how many
complaints/requests received and replied to but it did not gave the details of queries
and complaints received and replied to in the corporate governance report.
Board of Directors of AB
There are no big changes in the size of board of directors, and also in
independent directors. But from 2009-1 0 to 201 1-201 2 there is increase in executive
directors. It is observed that the Andhra bank is having sizeable number of directors
in the board of directors.
It is found that Andhra Bank is disclosing all the information related to board
of directors. (Joining date, Experience, Designation, etc.,) but most of the absentees
in the board meetings are nominated directors. i.e., (RBI, Government of India, and
part time directors).
Audit Committee of AB
It is observed that in the year 2005-06 in Andhra Bank, Independent directors
nominated by RBI had not attended a single meeting. The bank has not disclosed
any information relating to the corporate governance report on audit committee.
Risk Management Committee of AB
There is gradual increase in the size of the board. But there was gradual
decrease in board meetings in the year 2002-03. It was 6, now it is 4. And also the
bank failed to prepare report of the risk committee on corporate governance.
Shareholders I Investors Grievances Committee of AB
In the period 2005-06, 2006-07, thi bank had received huge complaints
cornpard to other years, i.e., 12648 and 12503, respectively. But the bank had
given details of complaints received and replied to in the corporate governance
Andhra Bank Remuneration Committee
The Andhra Bank constituted a remuneration committee on 2005, with the
initiative of Ministry of Finance. The bank had disclosed the details of remuneration,
how much amount was paid and to whom. It is observed that the bank has been
conducting meeting yearly once only, with combination of nominated directors. But
the bank failed to disclose the details of attendance of board of directors.
Board Strength and Size of the HDFC Bank
And in the year 2003-04 the bank had not disclosed about non executive
directors on the board. During the period 2006-09, the bank had 9 directors on the
board. If the bank chairman is an independent chairman, the number of independent
directors should be 113 or approximately 33%. But the percentage of independent
directors in HDFC is 45%.
Audit Committee Size and Attendance in HDFC
In the year 2002-03 the bank had not disclosed about audit committee
charter. In the year 201 1-12 specifically the bank disclosed audit committee charter.
It is observed that the bank had clearly disclosed committee decisions, what the bank
had done in the meetings, and regarding changing the policies, and
recommendations.
Risk Management Committee
In the year 2002-03 the risk committee had 5 directors on the board, but in
the year 201 1-12, the directors in the board were 3. It is found that there is gradual
decrease in the board size.
HDFC Bank Remuneration Committee
The HDFC bank is disclosing the d&ils of remuneration committee. In the
year 2002-03 the bank had not disclosed aboutromposition of the board. In the year
2003-04 the remuneration committee consisted of independent directors in the
board. During this period 2005-12 except the chairman all others on the board were
independent directors.
Board Strength and Size of the ICICI Bank
And also fiom 2002 to 2012 the ICICI had not disclosed any information
relating to non executive directors on the Board. It is observed that fiom 2005-06 the
ICICI maintained 70% independent directors, but in the year 201 1-2012 the bank
gradually decreased the independent directors to 58% on the board. And also the
ICICI had furnished all the information about all the directors.
Audit Committee of ICICI Bank
It is found that the ICICI bank audit committee size decreased. And the
ICICI bank Audit Committee is constituted as per RBI guidelines. The audit
committee is to meet at least 6 times a year.
ICICI Bank Risk Management Committee
In the year 2002-03 the bank has disclosed the combination of risk
committee and audit committee.
ICICI Bank Shareholders1 Investors Grievances Committee
All the complaints1 requests had been resolved. It is found that the bank did
not furnish the details of the queries received in the corporate governance report.
ICICI Bank Remuneration Committee
In the year 2006-07, the committee had met 3 times. Out of 5 directors 3
directors attended 3 meetings, 1 attended for 1 meeting, and 1 has not attended even
a single meeting. The reason had not been mentioned in the corporate governance
report.
ROA
The Mean value of SBI (0.90) is low'= than that of A.B, ICICI and HDFC.
And their mean values are 1.38, 1.24 and 1146 respectively. The CV (10.05) of
HDFC is low. So the performance is good &d also more consistent than that of
other select banks. But the growth rate (0.39%) is not significant. It is found that the
HDFC had high ROA than other sample banks. But ~ n d h r a Bank had better growth
rate than other sample banks.
ROE
The mean values of ROE of select public sector banks are 37.26% and
42.55%. Their performance is better than that of select private sector banks. The CV
of SBI, AB, ICICI and HDFC are 20.36, 33.77, 28.20 and 32.65 respectively. The
SBI CV result shows more consistent performance than others during the study
period. The Linear growth rates of all select banks are statistically significant.
Descriptive Statistics
Return on Assets
The mean value for ROA was 1.14%, with a minimum of 0.71% and a
maximum of 1.72% for public sector sample banks. In private sector sample banks,
the mean value was 1.35%, with a minimum of 0.98% and a maximum of 1.77%.
Results report that the profitability is based on total assets. It is found that the private
sample banks had higher ROA than Public sector sample banks.
Return on Equity
ROE averaged around 39.91 % in public sector banks with a minimum value
of 26.58% to a maximum value of 67.71%. The mean value of return on equity
decreased in private sector banks to 23.17% with a minimum value 14.73 of % and a
maximum value of 35.35%. Results of descriptive statistics show performance based
on shareholders equity is better in public sector banks than in private sector bankq.
Board of Directors
Board of Directors (BOD) as reported in descriptive statistics, varies
significantly in Public and private sector banks in terms if size. The minimum size of
a board reported in public sector sample banks was 9.0 and maximum~size was 15.
The minimum size of a board reported in Private sector was 9 and maximum size
was 19. The average size of a board in Public and private sector banks was 11.55
and 1 3.05 respectively.
Non-Executive Directors
Board composition, which is the proportion of non-executive directors on the
boards, shows that there is a variation in the percentage of non-executive directors
on the boards in Sample banks. In Public sector banks, the number of non-executive
directors ranged from a minimum mean of 6.0% to a maximum mean of 12.0%, and
in private sector sample banks it ranged fiom a minimum mean of 6.0% to a
maximum mean of 16.0%. The mean proportion of the non-executive directors on
the boards was 8.90% in public sector and 10.50% in private sector banks, which
shows that non executive directors proportion in the board was higher in private
sector sample banks, than in public sector sample banks.
Total assets (TA)
Total assets (TA) of the companies in the sample had a minimum value of
19852 Crores, a maximum value of 1340000 Crores and a mean value of 330960
Crores for Public Sector Banks. The minimum for Private Sector banks is 30425
Crores, the maximum is 474000 Crores and the mean value is 223060 Corers.
Correlation Matrix for Sample banks
The results suggested that Return on Assets correlation was significant with
Risk Board of Directors, Reiurn on Equity and Total Assets in select Public sector
banks. But it is not significantly correlated with performance variables of Board of
Directors, Audit committee Board of Directors, Grievance committee Board of
Directors and Non-Executive Directors. On the other hand, both Return on Assets
and Total Assets have negative association with significant result.
Return on Assets was significantly correlated with Board of Directors and
Risk Board of Directors in select Private sector banks, suggesting that board
independence is associated with Return on Assets. But it is not significantly
correlated with total assets in select private sector banks.
b a r d of Directors is significantly correlated only with the Non-Executive
Directors of the firm in select public sector banks, but it is not correlated with other
select variables. Whereas in select Private Banks Board of Directors has
significantly negative correlation with Audit.cornmittee Board of Directors, and
Total Assets but it has positive association with Risk management Board of
Directors, Grievance Board of Directors and Non Executive Directors.
The presence of Audit committee Board of Directors is not significantly
correlated with select variables in the study in the public sector banks but it has
significantly negative correlation with Grievance Board of Directors and Non
Executive Directors in select private banks.
The presence of Risk Board of Directors significantly correlated with
Grievance Board of Directors and Non Executive Directors but in the case of Private
sector banks it is significantly correlated with Grievance Board of Directors and
Total assets. It has positive association with Grievance Board of Directors and
negative association with Total assets.
Return on Equity, Non-Executive Directors and Total Assets do not have any
association with select variables in public sector banks. In the case of private banks
Non-Executive Directors have significant negative association with Total Assets.
However, in the case of private sector sample banks correlation test results
support firm performance. Based on Return on Assets are significantly correlated
with Board of Directors, Risk management Board of directors and Non Executive
directors. Hence there was Corporate Governance impact on firm performance, in
private sector banks only
Deposits
In the field of deposits mobilization public sector banks are ahead of private
sector banks
Investments
In the area of investments the performance of private sector banks is
relatively better than that public sector banks.
Advances
In the field of advances public sector banks have performed better than their
private sector banks counterparts.
Suggestions
Basing on the observations made from the prec;?ding discussions, an attempt
is made here to offer some appropriate suggestions which are expected to be useful
to strengthen the banking sector in all respects. In the foregoing pages an attempt
was made to record the results of a carefully carried out first-hand study of the
Corporate Governance Practices in select Commercial Banks In India, with
particular reference to a sample of 2 Public and 2 Private Sector Banks, focusing on
their governance practices, their upward and downward trends, the possible reasons
for it, the adequacy or otherwise of the already made attempts to set things right. It is
necessary to add here that though the number of the sample Banks studied seems
small, they are fairly representative of the Banking sector in India as a whole, and
therefore the conclusions drawn have a general validity. In the following pages some
practicable suggestions are given to improve further the Corporate Governance
Practices.
Most of the existing governance framework is generally adequate and should
remain intact. But the devil is in the details of implementation. A key priority is to
increase the capacity of boards to oversee strategic risk taking and to accurately
judge institutional performance. Improving board capacity will require upgrading
the skills, experience, and leadership of nonexecutive directors and rebalancing the
productive tension that should come with a high-performing board.
Shareholders, particulafly longer-term institutional investors can play a
greater role to increase the capacity of boards in this respect through more
responsible interaction with the boards and a focus beyond short-term returns that
might compromise long-term safety and soundness.
The current environment for corporate governance in many countries can be
described as co-regulatory, where there is a mix of principles and mandatory
requirements. There are strong incentives io continue this stance worldwide as
increasing globalization of capital markets sees a growing recognitionand desire to
achieve uniformity and harmonization id the. areas of auditing and good principles of
corporate governance in banking institutions.
The most obvious governance-related policy responses have accompanied
government support to troubled financial institutions. In addition, international
organizations and standard setters should update th;? principles and guidelines,
focusing more on the effective implementation of existing rules than on radically
different or additional standards.
Governments and regulators are also pursuing reforms, both through
mandatory rules applicable to financial institutions and through enhancements to
corporate governance codes applicable to all listed companies. Reforms are expected
in executive remuneration, board independence and composition, and risk
governance structures.
The events that occurred provided the stimulus for significant changes to the
legislation and the principles concerning corporate governance but with all rules and
regulations it is necessary to balance the public interest of imposing rules and
providing strong guidelines.
Corporate governance is a mechanism to enhance corporate performance,
shareholders' confidence and wealth maximization to the shareholders. In this
context it is a dire need to strengthen corporate governance mechanism and
corporate variables as well by following sound corporate governance policies and
guidelines which are in vogue in the world.
The performance of the companies directly depends on the effectiveness of
the board size of the company. Therefore, the board should be constituted with
eminent experts who are having professional expertise in their respective fields. It is
observed that in the sample companies there is no uniformity in terms of the size of
the board, qualification, experience, professional expertise, remuneration and their
contribution to the overall development of the company. Therefore, it is suggested
that the banking institutions should follow strictly the corporate governance norms,
standards which are universally acceptable, so that, the companies can take into
consideration the sound corporate policies. .
The boards usually function keeping the best Corporate Governance
practices in mind. Still there are some areas that need to be looked in to. For
example, in risk management and internal audit boards have to play a major role in
this regard. Therefore, the board members should have proper information in the
manner in which internal audit in banks conducted and the risk is managed.
Banks in India should constitnte the board by giving priority to factors like
skills and experience of persons for appointing them as board directors. Simply age
or gender persons alone should not be taken in to consideration when appointing
directors. Bias in favour gender or age can harm the interest of the bank.
As per the Corporate Governance practices, the board meetings in banks
should be conducted frequently. However for making the board meetings effedive,
banks should take certain steps like informing board members in advance about the
agenda for meeting etc. This will help the board members to come properly prepared
to the meeting. Then they can have meaninghl discussions on the issues to be
discussed.
To protect the interest of the stakeholders, the boards should oversee risk
management and internal audit in banks. The board members should have the
professional skills and abilities to tackle the risk aspects in the banking business.
Banks should give high priority to transparency when giving information to
stakeholders like their shareholders, the media etc. Those banks should display on
their website all relevant financial and non financial information. This will help all
stakeholders like the shareholders and other to have easy accesses to vital
information. It is suggested that effective measures may be taken to ensure the
adherence to this as per the corporate governance regulations. The principles laid
down by the non-governmental organisations like Organisation for Economic Co-
operation and Development (OECD) and the lawfully established boards like the
SEBI may be prescribed to be followed scrupulously.
The banks seek shareholders' approval when appointing directors. But all
shareholders have a right to elect or dismiss directors. To elect properly qualified
directors shareholders should have all reletant information about persons being
appointed as directors, such as their qualification, skills experience etc. Therefore,
the banks should give priority to transparency in the area. That means they should
disclose all information about the directors to the shareholders. Banks should make
every shareholder aware of his rights and responsibilities it would be better if such
information is provide to shareholders in the form of a hand book.
TO ensure proper Corporate Governance pradices banks should arrange
regular meetings with important stakeholders like shareholders, and share all
relevant information with them like important development in the field of banking
and challenges facing the banks. The Banks should provide training to both board
members and senior managers on corporate governance issues by conducting
training programmes in partnership with other reputed global institutions.
More appropriate measures should be adopted in the present global market
milieu to avoid further corporate failures. In this context it is essential to follow
global corporate governance standards which are well accepted bench marks for all
corporate world. The banks should follow well and universally accepted corporate
governance standards effectively and efficiently. Therefore, all the countries should
make a serious effort for designing appropriate corporate governance mechanisms to
strengthen banking sector. It is hoped that these measures would certainly go a long
way in reshaping the banking institutions in the corporate world. Let us hope that the
banking institutions would flourish with the implementation of sound and effective
corporate governance standards in the global economic environment.