GOVERNANCE CHALLENGES IN INDIAN BANKS: A PUBLIC AFFAIRS

PERSPECTIVE

ABSTRACT

Weak governance framework in Indian Public sector banks has paralyzed their performance with

declining profitability and deteriorating asset quality. In order to tackle the governance issues in

Public Sector Banks (PSBs) Indian govt. established Bank Boards Bureau (BBB) in April 2016

to revamp the existing governance structure in PSBs. However, the issue management

framework of establishing BBB is not immune to several challenges and has not been able to

achieve its desired objectives. This paper looks at the weak governance issue in PSBs from an

issue management perspective by using the famous Jones & Chase (1979) issue management

framework. In light of this framework the paper makes several recommendations to effectively

address the governance challenges in PSBs in India. The findings of this paper may be useful for

other emerging economies facing similar governance issues in their banking sector.

Keywords: Public sector banks, Indian banking, issues management, Corporate governance in

banks.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 2 of 18

INTRODUCTION

As defined by Zingales (1998) “Corporate Governance is a group of mechanisms used by

stakeholders to ensure that directors efficiently manage corporate resources, a task that includes

the manner in which quasi rents are developed and distributed.” Corporate governance in banks

is a critical aspect and any weakness in bank governance may destabilize the economy and pose

a systematic threat to the economy (OECD, 2006). Seeing the crucial role of corporate

governance in banks, Basel Committee on Banking Supervision has called for the need to

comprehend and improve governance mechanism in banks (De Andres & Vallelado, 2008).

Corporate Governance broadly comprises of board of directors, executive compensation,

ownership structure etc. where board characteristics and executive compensation occupy a very

prominent position. Boards in banking and financial firms are different from non-financial firms

as they are bigger and independent as compared to non-financial firms (De Andres et al., 2012).

Also, board is more important in banks as compared to non-financial firms because in banks their

fiduciary responsibilities extend well beyond shareholders to regulators and depositors (Macey &

O’Hara, 2003). Though the Indian banks are crippled with galloping stressed assets it is

imperative to address often neglected structural problems like governance framework in Public

Sector Banks (PSBs).1 The weak governance framework in Indian PSBs has often been cited as a

primary factor for their surging stressed assets and poor profitability. Corporate Governance

remains one of the biggest challenges for the Indian PSBs. According to ex-governor, The

Reserve Bank of India (RBI), Y.V Reddy the weak governance in PSBs can be seen in the

difference between the stressed assets position in PSBs as compared to private banks. The

1
Public sector banks are state owned commercial banks where majority of ownership (at least 51%) is by the Govt. of India.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 3 of 18

governance challenge in PSBs remains unaddressed.2 As per Krishnamurthy Subramanian

Professor at Indian School of Business Hyderabad, fixing the governance issue in PSBs is very

important otherwise the governance issue will aggravate or will be a serious concern during bad

times. It is important to empower boards and adequately tackle the board governance challenge

in PSBs.3 Harun Khan ex-deputy governor RBI highlights governance as a major challenge from

the regulatory perspective for Indian banks. It is important to improve quality of board

deliberation in PSBs along with enhancing its effectiveness. Nonetheless some of the private

banks with prominent shareholders domination also face similar governance challenges. 4 As per

S.S Mundra ex RBI deputy governor, corporate governance is one of the critical challenges for

PSBs in India. Some of the major challenges in governance setup of PSBs are CEO Chairman

duality5, professionalizing PSBs boards, impending vacuum created with the retirement of chunk

of middle management staff etc.6 In the words of ex-governor RBI, Raghuram Rajan, there is a

need to review and strengthen the governance framework in banks by having a proactive board

and by improving the salary and incentive structure of top management and bank executives. 7 A

popular press article highlights that governance reform in banks should precede banking reforms

such as capital infusions by the govt. otherwise it may lead to putting good taxpayer’s money

after bad.8 Weak corporate governance, poor board supervision and excessive govt. interference

are the structural deficiencies in the Indian PSBs. Excessive govt. interference dictates lending

decisions at PSBs fulfilling the socio development objectives rather than commercial factors

driving it. The quality of management in PSBs is also poor due to the non-transparent

2
https://www.bloombergquint.com/business/2017/07/01/yv-reddy-on-advice-dissent-and-central-banking, accessed July 25,2017.
3
http://www.livemint.com/Opinion/HOkJ0zUb7cwHRDsX0AOenM/Fix-the-governance-of-public-sector-banks.html, accessed July 25,
2017.
4
https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=903, accessed July 25, 2017.
5
CEO Chairman Duality is a situation where Chairman and CEO is one and the same person.
6
https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=926, accessed July 25, 2017.
7
http://indianexpress.com/article/business/business-others/need-to-review-psb-governance-improve-salaries/, accessed July 25, 2017.
8
http://www.livemint.com/Opinion/dusnp3sc9xS6SA9EpI19pO/Improving-governance-in-banks.html, accessed July 25, 2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 4 of 18

appointment process, lack of accountability etc. Poor governance in PSBs has showed its impact

in terms of surging bad loans and declining profitability and efficiency in these units. 9 After

highlighting the structure of Indian Banking system in the next section the paper presents the

regulatory framework for corporate governance in Indian banks with a focus on board

governance followed by the linkages between board governance and bank performance in India

followed by the discussion on issue management framework for understanding the governance

challenges in PSBs. In the end the paper makes several recommendations to effectively address

these governance challenges in PSBs.

OVERVIEW OF THE INDIAN BANKING SYSTEM

The banking regulatory and supervisory authority RBI was established in 1935 under the RBI

Act, 1934. The banking sector in India comprises of commercial banks and the cooperative

banks where commercial banks account for more than 95% of market share in the banking

business in India at the end of March 2012 (Sarkar & Sarkar, 2016). On the basis of ownership,

scheduled commercial banks include public sector banks, private sector banks, foreign banks 10

and regional rural banks11. Public sector banks in India, comprises of State bank of India and the

nationalized banks. Domestic private sector banks are commercial banks where majority of

shareholding or ownership is held by domestic private shareholders. They are further classified

into new and old private sector banks on the basis of their establishment before or after 1992.

New private banks are those private banks which were established after 1992 whereas old private

banks were established before 1992.

9
http://www.business-standard.com/article/news-cm/recommendations-to-improve-india-s-public-sector-banks-governance-are-credit-
positive-114052001071_1.html, accessed July 25, 2017.
10
Foreign banks are those commercial banks where majority of shareholding is by foreign investors.
11
Regional rural banks were setup under the Regional Rural Banks Act, 1976 with the aim to ensure adequate institutional credit to rural
and agricultural sector.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 5 of 18

As on 31st March 2012, PSBs dominate the banking system in India with 75% share of deposits

in the banking system (Sarkar & Sarkar, 2016).

GOVERNANCE SETUP IN INDIAN BANKS

The disclosure for corporate governance of listed companies12 is mandated using Clause 49 of

listing agreement by Securities Exchange Board of India (SEBI). For board of directors Clause

49 states that boards of listed companies should have an optimal combination of board of

directors. If chairman of the board is a non-executive director one-third of the board should

comprise of independent directors or if he is an executive director one-half of the board should

have independent directors. In addition Clause 49 also stipulates guidelines on composition and

operation of audit committee, board procedures, remuneration of directors, management,

reporting requirements etc. While all commercial banks in India are regulated under the Banking

Regulation Act, 1949, PSBs are additionally regulated by Ministry of finance govt. of India

under the Banking Companies Act 1970, Bank Nationalization Act 1980 and State Bank of India

Act 1955 (Sarkar & Sarkar, 2016). Since PSBs are additionally regulated by govt. of India it

significantly influences the way their boards are designed. Govt. being the controlling owner, it

has power to nominate directors on the PSBs board. Govt. has power to nominate Chairman &

Managing Director (CMD) of all PSBs, have one central govt. nominee on the board, nominate

two directors one a workmen employee and other an officer employee of a PSB, nominate a

chartered accountant director and upto six directors from the general category (Sarkar & Sarkar,

2016). Govt. has powers to fix the tenure of all whole time directors including the CMD which

has been currently capped at 5 years (Sarkar & Sarkar, 2016). Thus, boards of PSBs are less

12
PSBs and Private sector banks are also listed in prominent stock exchanges like National Stock Exchange and Bombay Stock
Exchange.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 6 of 18

empowered, less flexible and are larger in size as compared to private sector banks (Sarkar &

Sarkar, 2016).13

BOARD GOVERNANCE AND PERFORMANCE IN INDIAN BANKS

This section identifies the linkage between board governance and bank performance. The

theoretical foundations of governance can be seen through the lens of agency theory. It predicts

that managers or agents may not act in the best interests of the owners or principal giving rise to

managerial opportunism (Jensen & Meckling, 1976). Investors may not be able to perfectly

monitor managers who may have superior information about the performance of the company.

Hence, investors (outsiders) can employ mechanisms like board of directors, executive

compensation, and market for corporate control etc. to ensure that management of the company

acts in their best interest and prevents any kind of principal agent problem. While board

governance and organizational performance has been thoroughly explored in the context of non-

financial firms, the research on board specific governance and financial performance in banks is

limited and largely confined to developed nations (De Andres & Vallelado, 2008; Pathan & Faff,

2013; Garcia-Meca et al, 2015; Wang et al. 2012; Salim et al. 2016). These studies are not

conclusive of any definite impact of board characteristics on banks performance.

The extant review of literature of governance mechanism in banks show very limited number of

studies that have examined the impact of board corporate governance mechanisms on the

financial performance and asset quality of Indian banks. Battaglia & Gallo (2015) conducted a

study on risk governance for Indian and Chinese banks and found that size of risk committee in

banks was positively related to accounting profitability measures of return on assets and return

13
Sarkar & Sarkar (2016) study found median board size of PSBs as 8 against 10 for old private sector banks and 11 for new private
sector banks.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 7 of 18

on equity and negatively related to market performance. Also, no. of risk committee meetings

was positively related to market performance in banks. Sarkar & Sarkar (2016) in their study on

board governance in Indian banks tested the relationship between board characteristics and firm

performance. Their findings demonstrate that board independence impacts bank outcomes where

CEO- Chairman duality and presence of nominee directors have a negative impact on bank

outcomes. To the best of our knowledge, Nanwal & Pathneja (2016) is the only study for India

that examines the impact of corporate governance mechanisms on banking sector total factor

productivity.14 The authors didn’t find any impact of corporate governance mechanisms on total

factor productivity in Indian banks. Ghosh (2017) investigated the impact of gender diversity in

banks boards on Indian banks performance and stability. The findings of this study show that

gender diversity doesn’t impact bank performance and stability. Mayur & Saravanan (2017)

examined the association between board characteristics and banks performance or asset quality

in India. The findings of this study demonstrate a cubic or curvilinear relationship between board

size and performance or asset quality. From the above studies it can be clearly seen that board

characteristics significantly influence bank profitability, efficiency and asset quality in India.

GOVERNANCE ISSUES IN PSBs- ISSUE MANAGEMENT PERSPECTIVE AND

CHALLENGES

Harris & Fleisher (2016) identify issues management as important organizational activity that

constitute part of public affairs. This paper identifies weak governance framework in public

sector banks as an important issue which if not adequately addressed may culminate into a severe

banking crisis. For effective issue management of board governance Indian govt. established

14
Total factor productivity measures the overall performance of the banking sector. It highlights the growth or performance which is not
explained by traditional factors of production.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 8 of 18

Bank Board Bureau (BBB)15 in April 2016 to reform the governance framework in PSBs. The

primary objective of establishing BBB was to revamp the governance structure in PSBs. The

main functions of BBB include selection and appointment of board of directors in PSBs and

helping them in forming business strategies and capital raising plan.16 Though establishment of

BBB was a step in the direction of revamping governance in PSBs its effectiveness has come

into question. A popular press article points out that the change in top leadership in Punjab

National Bank (PNB) and Bank of India (BOI) was neither recommended nor discussed with

BBB. There have been many other instances where BBB’s recommendations have been ignored.

For example recommendations of BBB related to performance linked incentives, employee stock

options, bonuses etc. for employees in PSBs have been ignored.17 Though BBB can recommend

names for top executives in PSBs they don’t have a final say in their postings. The

recommendations of BBB are not taken seriously and instead of referring them to the cabinet

appointments committee for approval finance ministry de novo scrutinizes them. Apart from top

level appointments all other terms of reference or functions of BBB have just remained on paper

and even for top appointments in PSBs it doesn’t have a final say and it depends upon the

finance ministry and the cabinet. BBB also doesn’t have any role in the appointment of non

official directors who constitute almost one third of board in PSBs and most of them are political

appointments.18 Moreover, instead of having only professional bankers as members of BBB its

membership comprises of secretary, department of financial services, govt. of India and

secretary, department of public enterprises, govt. of India with govt. interference in its

functioning raising a question on its independence. Though the govt. has initiated measures like
15
The establishment of BBB was in line with the recommendations of P.J Nayak committee for revamping governance framework in
Indian banks.
16
http://banksboardbureau.org.in/WhatsNew/Details?id=4, accessed July 25, 2017.
17
https://www.bloombergquint.com/business/2017/05/09/the-psu-bank-reshuffle-and-ineffectiveness-of-the-banks-board-bureau,
accessed July 25, 2017.
18
http://www.livemint.com/Opinion/xI2UOoynj6CMW9yQTkji4L/A-paper-tiger-called-Banks-Board-Bureau.html, accessed July 26,
2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 9 of 18

separating the position of CEO and chairman in PSBs, more objective selection process etc., it

doesn’t fill the void of weak governance setup in PSBs. In the words of T.T Ram Mohan the

answer to fix governance doesn’t lie in separating the post of CEO and chairman but in

strengthening the boards by having more independent directors on boards with proper training

given to government and RBI directors. There should be proper selection process of independent

directors through an independent appointments body.19 Acharya & Subramanian (2016) argue

that the boards of PSBs are disempowered, lack necessary expertise and the selection process of

board members is weak resulting in weak board as well as overall governance in PSBs. They

further point out that governance challenges in PSBs are also a result of external constraints like

dual regulation by govt. and RBI, board constitution and compensation differences with private

sector banks. The reform measures for effective governance in PSBs like establishing BBB,

separating the post of CEO and chairman etc. do not effectively address the weak governance

setup in these units. The biggest challenge for the effective governance reform in PSBs is to

address the huge executive and top management compensation differential between PSBs and

private banks. According to ex-governor, RBI, Raghuram Rajan, there is strong need to review

the incentive structure and improve salaries of bank executives in PSBs so as to draw private

sector talent into PSBs and improve its governance.20 A popular press article highlights the

differences in salaries of top executives in PSBs and private banks. It shows that India’s top govt.

banker may take around 200 years to earn what her private counterparts are earning. It also

highlights the words of Raghuram Rajan who feels in PSBs they overpay at the bottom and

underpay at the top thus failing to attract good talent at the top level.21 Even BBB made

recommendations to revamp compensation packages in PSBs by introducing employee stock

19
http://ttrammohan.blogspot.com/2015/01/gyan-sangam.html, accessed July 26, 2017.
20
http://indianexpress.com/article/business/business-others/need-to-review-psb-governance-improve-salaries/, accessed July 26, 2017.
21
https://qz.com/1015626/salary-gap-state-bank-of-india-chief-arundhati-bhattacharya-is-paid-less-than-5-of-what-top-private-sector-
bosses-make/, accessed July 26, 2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 10 of 18

options (ESOPs), bonuses etc. for PSBs employees but it is all under the carpet and remains

unfulfilled.22 An important suggestion made by Nayak Committee23 to strengthen governance

framework in PSBs was to establish a Bank Investment Company (BIC) where govt. equity is to

be transferred to BIC which will dilute its ownership in individual banks below 51%. Govt. of

India didn’t consider this suggestion of Nayak Committee as govt. doesn’t want to dilute its

control from PSBs. In the words of T.T Ram Mohan the idea of govt. diluting its control from

PSBs is hogwash and it won’t happen. Even if BIC is put into place sometime govt. will not drop

its ownership below 52%.24 He also points out that the idea of establishing BIC is a nightmare

and won’t ensure any autonomy for PSBs. It would be unfair to entrust this task of 26 PSBs to a

body of professionals, who may again be amenable to govt. influence.25

Given the challenges faced by PSBs it is not easy to revamp the governance framework in PSBs

in India. The governance issue management framework by Govt. of India and RBI through

establishing BBB, separating the position of CEO and Chairman does not effectively address the

governance problem in these units that are structural and require a deep rooted holistic approach.

This paper looks at the governance issue in PSBs from an issue management perspective. It is

important to define issue for a better understanding of issues management. According to Crable

& Vibbert (1985) an issue is developed when one or more human agent attaches importance to

the situation or problem. Issues management is a tool for identifying issues and influence

decisions around it before its adverse effect on the concerned unit. For effective governance

framework in PSBs this paper uses the Jones & Chase (1979) issue management framework.

This framework presents a five stage process for effective issues management as following: 1)

22
https://www.bloombergquint.com/business/2017/05/09/the-psu-bank-reshuffle-and-ineffectiveness-of-the-banks-board-bureau,
accessed July 26, 2017.
23
https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/BCF090514FR.pdf, accessed July 27, 2017.
24
http://ttrammohan.blogspot.com/2015/08/indradhanush-fortune-for-psbs-at-end-of.html, accessed July 26, 2017.
25
http://ttrammohan.blogspot.com/2015/01/gyan-sangam.html, accessed July 26, 2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 11 of 18

Issue identification, 2) Issue analysis, 3) Issue change strategy options, 4) Issue action program

and 5) Evaluation of results.

Issue Identification- The early identification of issues is critical for their effective management

as well as prevention of any future crisis. In this context the broader issue is the weak

governance framework in PSBs loaded with dual regulation by govt. and RBI, poor board

composition (lack of independent directors), executive and top management compensation in

comparison to private banks, disempowered board with lack of necessary expertise etc. The ex-

governors of RBI Raghuram Rajan, Y.V Reddy and ex RBI deputy governor S.S Mundra have

identified weak governance framework as an important issue of concern for PSBs. No bank can

simultaneously manage and address all issues. Banks need to form procedures for identifying and

managing critical issues of primary concern to them. The primary issue at hand that requires

immediate attention is the designing compensation structure for bank executives and attracting

necessary talent from the private sector to top management in PSBs . Also, govt. control needs to

be reduced along with more independent board of directors in the board of PSBs with proper

selection criteria.

Issue Analysis- After issue identification the crucial element is issue analysis. Issue analysis

focuses on theory and research about issues. In issue analysis it is important to determine the

origin of the issue, identify the past experience with the issue and identify the impact of the

issue. The weak governance in PSBs with issues like executive or top management

compensation, dual regulation with excessive govt. interference and lack of board independence

stems from the very nature of PSBs or excessive govt. control. Experts from banking sector

identify this weak governance structure in PSBs as a cause of concern for banks, regulator RBI

and policy makers. Though there have been proposals to revamp pay structure in PSBs by
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 12 of 18

including performance based pay structure as well as matching the salaries with private

counterparts Govt. of India is not keen to accept it and even if it does it will be in a very

restricted way. The Govt. of India will not be keen to move away from the basic system of the

pay commission. If the governance framework in PSBs is not adequately addressed it may lead

to a banking or financial crisis. It is widely known that one of the primary reasons for global

financial crisis of 2007-2008 was the weak governance framework of banks and financial

institutions.

Issue Strategy Change Options- This section highlights the response to challenge emerging from

the issues of concern. It is concerned more with the decisions made with regards to the

challenges from the issues. The Jones and Chase model identifies three options to deal with the

issue change as following: First is the reactive change where a company or organization decides

not to change, second is the adaptive change option which is the openness to change and relies

on planning for strategy change and third is the dynamic change option which is concerned about

forming real solutions for real problems. In this case what is needed is the adoption of dynamic

strategy change option where the Govt. of India and RBI play a very upbeat role in containing

the issue of governance framework in PSBs. They should come together and proactively deal

with the issue so as to prevent any financial crisis in the future. The transformation of

governance framework in PSBs must involve effective coordination as well as a dynamic

approach from relevant stakeholders like Govt. of India, RBI and banking experts.

Issue Action Program- This stage involves forming goals and objectives where goals are broad

and give direction to authorities whereas objectives are formed after goals are determined. It also

talks about the strategies to achieve these goals and objectives. The broad goal here should be to

reform the governance framework in PSBs and specific objectives are to restructure or revamp
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 13 of 18

the compensation system in PSBs by eliminating pay differentials between PSBs and private

banks, to reform the board structure in PSBs by including more independent directors with

necessary expertise, to dilute the government stake in PSBs below 51%, granting more autonomy

and independence to BBB with greater functions and responsibilities like independent

appointment of non-official directors, restructuring PSBs so that they function like private banks

complying with the standards followed by private banks or other companies.26

Evaluation of Results- The accomplishment of issue action program goal doesn’t imply the issue

management process is over. It involves evaluating the results of real versus intended program.

The decision authorities (Govt. and RBI) must continuously evaluate the issue of weak

governance framework and search for economic, social and political factors that may

reinvigorate the issue of weak governance in PSBs. Governance framework in PSBs is

significantly influenced by economic and political factors. Therefore, it is crucial to identify

these factors which may resurrect the issue of governance in PSBs.

CONCLUSION

Weak governance framework in PSBs is one of the crucial factors for their poor performance in

the recent past. Their poor performance can be seen in terms of their deteriorating asset quality

and declining profitability. Given the political and democratic setup of India the solution to

governance problem in PSBs is not easy. Further, government control in PSBs makes the

situation worse. This paper looks at the issue of weak governance framework in PSBs from an

issue management perspective. The major issue management reform initiated by Govt. of India

and RBI for weak governance in PSBs was establishing BBB and it has not been immune to

26
http://economictimes.indiatimes.com/industry/banking/finance/banking/has-banks-board-bureau-really-helped-state-run-banks-to-
clear-the-messy-system/articleshow/59344874.cms, accessed July 28, 2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 14 of 18

several challenges. Therefore, using the issue management framework of Jones & Chase (1979)

this paper identifies weak governance in PSBs as an issue of concern for banks, RBI and Govt.

of India. Using this framework the paper identifies the issue of concern, conducts analysis of the

issue, highlights the issue action plan and makes several recommendations to address the issue in

PSBs to prevent any crisis in the future.

RECOMMENDATIONS

First, for effective issue management of weak governance framework in PSBs it is important to

tackle the issue of compensation differences in top management between PSBs and private

banks. This in line with the recommendations of Ex-governor, RBI, Raghuram Rajan who argues

that the low compensation at top level of PSBs prevents them from attracting good quality

private players. It is important to raise salaries in PSBs along with developing an incentive

structure of performance based pay, ESOPs, bonuses etc.

Second, the excessive govt. controls in PSBs have inhibited their growth and performance. It is

imperative to reduce govt. stake below 51% in PSBs. One possible solution suggested was the

establishment of BIC with govt. equity and BIC eventually diluting its stake in banks below

51%. As highlighted by T.T Ram Mohan this would be a nightmare and won’t ensure any

autonomy for PSBs. He also calls this idea of govt. giving its control from PSBs a hogwash. 27

Privatization of weak PSBs seemed to be a best solution. This may take care of govt. interference

as well as political meddling with PSBs.

Third, the establishment of BBB by govt. of India and RBI to reform governance framework in

PSBs has not been able to achieve its desired objectives. The governance issue management

27
http://ttrammohan.blogspot.com/2015/08/indradhanush-fortune-for-psbs-at-end-of.html, accessed July 27, 2017.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 15 of 18

framework by establishing BBB is not immune to several challenges. Instead of having members

from Govt. of India the membership of BBB should comprise of only independent banking

experts. For effective functioning of BBB it is imperative to ensure that BBB has adequate

independence and autonomy in its functioning. The task of appointments of heads and board

members of PSBs should rest entirely with BBB rather than the current system of entrusting that

task to finance ministry or cabinet approvals committee. The authorities may ensure that the

scope of BBB is widened by including appointment of non-official directors, top management

etc.

Fourth, In line with Acharya & Subramanian (2016), govt. of India should distance itself from

the governance functions it discharges in PSBs. The Bank Nationalization Act of 1970 and 1980

and SBI Act must be repealed. Public sector banks should be incorporated like other corporations

under Companies Act and must satisfy the clause 49 corporate governance requirements

prescribed by regulator Securities Exchange Board of India. Since PSBs are listed entities they

should strictly comply with the listing requirements of stock exchanges and follow standards

followed by other corporations.

Fifth, the board of PSBs are not independent and lack professionalism as well as necessary

expertise. In order to address this issue appointment process in boards of PSBs should be

professionalized with necessary expertise of board members. Govt. interference in board

appointments should be appropriately addressed. The number of independent members in boards

should increase with greater diversity among its members. The task for appointment of

independent members should lie entirely in the domain of BBB or some independent body

comprising of expert banking professionals.

GOVERNANCE CHALLENGES IN INDIAN BANKS Page 16 of 18

REFERENCES

Acharya, V., & Subramanian, K. V. (2016). State intervention in banking: the relative health of

Indian public sector and private sector banks. In Monetary Policy in India (pp. 195-230).

Springer India.

Battaglia, F., & Gallo, A. (2015). Risk governance and Asian bank performance: An empirical

investigation over the financial crisis. Emerging Markets Review, 25, 53-68.

Crable, R. E., & Vibbert, S. L. (1985). Managing issues and influencing public policy. Public

Relations Review, 11(2), 3-16.

De Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board

of directors. Journal of banking & finance, 32(12), 2570-2580.

De Andres, P., Romero‐Merino, M. E., Santamaría, M., & Vallelado, E. (2012). Board

determinants in banking industry. An international perspective. Managerial and Decision

Economics, 33(3), 147-158.

García-Meca, E., García-Sánchez, I. M., & Martínez-Ferrero, J. (2015). Board diversity and its

effects on bank performance: An international analysis. Journal of Banking & Finance, 53, 202-

214.

Ghosh, S. (2017). Why is it a man’s world, after all? Women on bank boards in India. Economic

Systems, 41(1), 109-121

Harris, P., & Fleisher, C. S. (2016). Introduction: The Continuing Development of International

Corporate and Public Affairs. In P. Harris & Craig S. Fleisher (Eds.), The SAGE Handbook of

International Corporate and Public Affairs (pp. 1–16). Sage.

GOVERNANCE CHALLENGES IN INDIAN BANKS Page 17 of 18

Jensen, M. C., and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency

costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Jones, B. L., & Chase, W. H. (1979). Managing public policy issues. Public Relations

Review, 5(2), 3-23.

Macey, J. R., & O'Hara, M. (2003). The Corporate Governance of Banks. Federal Reserve Bank

of New York Economic Policy Review, 9(1), 91.

Mayur, M., & Saravanan, P. (2017). Performance Implications of Board Size, Composition and

Activity: Empirical Evidence from the Indian Banking Sector. Corporate Governance: The

International Journal of Business in Society, 17(3).

Narwal, K. P., & Pathneja, S. (2016). Effect of bank-specific and governance-specific variables

on the productivity and profitability of banks. International Journal of Productivity and

Performance Management, 65(8), 1057-1074.

OECD, 2006. Policy Brief on Corporate Governance of Banks in Asia. Asian Roundtable on

Corporate Governance.

Pathan, S., & Faff, R. (2013). Does board structure in banks really affect their

performance?. Journal of Banking & Finance, 37(5), 1573-1589.

Salim, R., Arjomandi, A., & Seufert, J. H. (2016). Does corporate governance affect Australian

banks' performance?. Journal of International Financial Markets, Institutions and Money, 43,

113-125.
GOVERNANCE CHALLENGES IN INDIAN BANKS Page 18 of 18

Sarkar, J., & Sarkar, S. (2016). Bank ownership, board characteristics and performance:

Evidence from commercial banks in India (No. 2016-016). Indira Gandhi Institute of

Development Research, Mumbai, India.

Wang, W. K., Lu, W. M., & Lin, Y. L. (2012). Does corporate governance play an important role

in BHC performance? Evidence from the US. Economic Modelling, 29(3), 751-760.

Zingales, L. (1998). Corporate Governance, in the New Palgrave Dictionary of Economics and

the Law, P. Newman ed.