Corporate governance challenges in Indian banks: A public affairs perspective

• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/pa.1946
• Author: Ganesh Radhakrishnan,Abhay Pant

PRACTITIONER PAPER

Corporate governance challenges in Indian banks: A public

affairs perspective

Abhay Pant |Ganesh Radhakrishnan

Jindal Global Business School, O.P. Jindal

Global University, Sonipat, India

Correspondence

Abhay Pant, T2‐14, O.P. Jindal Global

University, Sonipat Narela Road, Near

Jagdishpur Village, Sonipat, Haryana 131001,

India.

Email: apant@jgu.edu.in

Weak governance framework in Indian public sector banks has paralyzed their perfor-

mance with declining profitability and deteriorating asset quality. In order to tackle

the governance issues in Public Sector Banks (PSBs), Indian government established

Banks Board 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 and Chase 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.

1|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 com-

prises board of directors, executive compensation, ownership struc-

ture, and so forth, where board characteristics and executive

compensation occupy a very prominent position. Boards in banking

and financial firms are different from nonfinancial firms as they are

bigger and independent as compared with nonfinancial firms (de

Andres, Romero‐Merino, Santamaría, & Vallelado, 2012). Also, board

is more important in banks as compared with nonfinancial 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 rising stressed assets, it is

imperative to address often neglected structural problems like

governance framework in Public Sector Banks (PSBs).

1

The weak gov-

ernance framework in Indian PSBs has often been cited as a primary

factor for their surging stressed assets and poor profitability. Corpo-

rate 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 differ-

ence between the stressed assets position in PSBs as compared with

private banks. The governance challenge in PSBs remains unad-

dressed.

2

As per Krishnamurthy Subramanian, Associate Professor at

Indian School of Business Hyderabad, fixing the governance issue in

PSBs is very important; otherwise, the governance issue will aggravate

and 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 of 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 gov-

ernance challenges.

4

As per S. S. Mundra, ex‐deputy governor of

RBI, corporate governance is one of the critical challenges for PSBs

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

chairman duality,

5

professionalizing PSBs boards, impending vacuum

created with the retirement of chunk of middle management staff,

Received: 17 March 2019 Accepted: 23 March 2019

DOI: 10.1002/pa.1946

J Public Affairs. 2019; :e1946.

https://doi.org/10.1002/pa.1946

© 2019 John Wiley & Sons, Ltd.

wileyonlinelibrary.com/journal/pa 1of719