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Indian public sector banks remain in a slump. Among the many recommendations for the banking sector recovery, a recurring theme has been measures to improve their corporate governance. New research reveals how this could happen. In a study published in the Economic and Political Weekly, Rekha Misra and Anwesha Das find that better corporate governance can increase bank profits and boost investor confidence.

They compare the status of corporate governance in Indian banks (across both public and private sector) by calculating a board composition index for banks. Specifically, the index focuses on the effectiveness of the bank’s board by examining the qualifications of those on the board, the independence of the board and its compliance with legal requirements. According to the authors, bank boards are a critical component for corporate governance since they set the rules and practices that determine a banks’ accountability, transparency and growth.

Using this index, the authors rate different banks. They find that banks with a higher index score recorded greater profits and higher, more stable share prices. They also find a greater variation in index scores among public sector banks compared to private sector banks suggesting that even with banks with similar ownership structure there can be significant variation in governance structures.

According to the authors, their results suggest that banks focusing on their board structure could help them raise additional capital from the market which can be especially important since Indian banks will need to raise capital to meet the enhanced requirements laid down by Basel-III. Because of all this, they conclude that the establishment of the Banks Board Bureau in 2016 to improve corporate governance was an important step for the banking sector.

Also read: Corporate Governance in Banks in India

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