Formulation of Corporate Governance Index for Banks in India

Abstract

This paper attempts to develop a mechanism to evaluate the quality of Corporate Governance for the scheduled commercial banks in India. Corporate governance in banks has become an imperative issue post the global financial crisis of 2007-08. A lot of research has been done since the eruption of the aforesaid crisis on the corporate governance of financial institutions. The paper first reviews the literature on the corporate governance of financial institutions, especially the banks. The study henceforth, explores corporate governance in banks as a distinct concept that has assumed importance globally over time. Subsequently, the paper reviews the current state of corporate governance in India and explores the scope for improvement of the same. The study eventually links both the assessments and places factors critical for evaluation of corporate governance of banks in the Corporate Governance Index. The benchmark for the Index was Clause 49 of Listing Agreement of the Stock Exchanges in India. The Index thus formulated consists of essential factors like board of directors, audit committee, remuneration committee, nomination committee, risk management, related party transactions and disclosures. These factors were delineated further by defining sub-elements under each head. These sub-elements were assigned individual scores on the basis of review of literature performed while selecting factors. The result of this study was a Corporate Governance Index designed especially for Indian banks. This paper would provide a guideline to academicians, practitioners and policymakers for evaluating quality of corporate governance of an Indian bank.

Keywords: corporate governance, corporate governance index, India, scheduled commercial banks, clause 49.