A Study of Corporate Governance in Public Sector Banks

Numerous factors influence Corporate Governance. Understanding and defining Corporate Governance is a challenging task. However, conducting research is crucial to grasp the evolving specific requirements of effective Corporate Governance practices and the consequences of such practices. This research delves into the Corporate Governance of banks in India by utilizing a specially crafted Corporate Governance Index for banks. The index, segmented into six sub-indices, was employed to determine the correlation between CG practices and the bank’s profitability, as measured by Return on Assets (ROA) and Net Interest Margin (NIM), as well as firm value metrics such as Price to Book value (PBV) and Tobin’s Q. Additionally, a comparison was made between the CG practices of CG-rated public and non-rated private sector banks in India. For this study, a selective sample of ten banks in India was chosen, comprising an equal number of public and private sector banks, with data collected over an eight-year period from 2009 to 2016. A fixed regression model was utilized to explore the relationship between the sub-indices and the dependent variables. In addition to the CG index, Capital Adequacy Ratio (CAR) and Net NPA ratio were considered as independent variables. The analysis revealed a weak correlation between CG and ROA and NIM, while a significantly strong relationship was established between CG and PBV and Tobin’s Q. Furthermore, the governance practices and financial performance of private banks were found to surpass those of public banks.