Corporate Governance in the Banking Sector in India

Abstract

The globalization and liberalization of the Indian economy are putting pressure on Indian banks to meet international standards. Over the years, India's financial sector has become more advanced and open. This has made it evident that high-quality standards are necessary. Corporate governance regulations cover a range of elements including internal checks, the structure and duties of the Board of Directors, transparency criteria, and risk handling. Adhering to these disclosure mandates will bring India in line with global standards. Given their pivotal economic role, banks hold immense importance, and upholding the robustness and security of the financial system is critical. Upholding elevated moral benchmarks is imperative for banks and financial entities to meet their societal obligations. Therefore, it is only through the adoption of efficient governance practices that banks can gain public confidence. In India, the increasing erosion of public trust in the supervisory framework of the banking sector can be ascribed to a variety of elements. These elements involve liberalization, occurrences of corporate failures within banks (with specific emphasis on cooperative banks), financial irregularities, and a range of misconducts that together contribute to the decline in public confidence. The entry of new private and foreign banks and increased stakeholder partaking have also intensified competition. Additionally, the global market boom has increased the demand for investment capital in both developed and developing countries. However, governments are reducing support to businesses, resulting in a decrease in available funding. Recognizing the importance of corporate governance in capital formation, policymakers now acknowledge that poor corporate governance, combined with corruption, disrupts resource allocation, undermines competition, and hampers future investment opportunities and economic progress. Banks that prioritize corporate governance standards and demonstrate transparency in transactions and disclosures command higher value due to their openness. Such banks gain the trust of stakeholders, leading to favorable outcomes. Implementing corporate governance principles helps banks and financial institutions assess risks and take timely corrective actions in case of failures. Therefore, adopting international standards and tightening prudential regulations would contribute to a stronger and more efficient banking sector in India.