Reserve Bank of India – Press Releases

The Reserve Bank of India right this moment launched on its web site the DRG Study* titled, “Governance, Efficiency and Soundness of Indian Banks”. The examine is co-authored by Rachita Gulati, Sunil Kumar, S. Chinngaihlian, Rajendra Raghumanda and Prabal Bilantu.

This examine adopts a granular analysis strategy and empirically explores the nexus between governance, effectivity and soundness within the Indian banking trade at varied disaggregation ranges utilizing the dynamic panel information fashions. Bank-wise composite indices of governance and soundness are computed utilizing the non-parametric “Benefit-of-the-Doubt” strategy, and the danger-adjusted revenue effectivity scores for banks are estimated by using the information envelopment evaluation strategy. The evaluation has been accomplished utilising a singular financial institution-degree panel dataset obtained from publicly out there data on company governance within the particular person financial institution’s annual report for the interval from 2008-09 to 2017-18. The key findings from the examine are as follows:

1. Although banks in India have made vital progress in adhering to governance requirements over the latest years, the present degree of compliance just isn’t ample to mark the prevailing governance construction as “socially efficient”.

2. The Indian banking trade remained fairly sound from 2008-09 to 2012-13, earlier than the early indicators of a decline in asset high quality and profitability have been noticed in 2013-14. In latest years, non-public banks have by and enormous proven an enchancment of their soundness place. However, a low degree of soundness stays a problem for public sector banks (PSBs) as a result of the above development was extra pervasive for PSBs.

3. There exist noticeable asymmetries within the coverage priorities of banks on the size of governance and soundness. Private banks demonstrated comparatively higher efficiency in adhering to governance norms pertaining to audit operate, adopted by danger administration and board effectiveness in the course of the examine interval.

4. Profit-efficient banks are sufficiently sound to maintain up capital buffers and take up shocks, which can diminish destabilising results. Therefore, to keep away from the danger of financial institution failure in the long term, business practices that guarantee sustainable earnings with proportionate danger have to be inspired.

5. Econometric findings from the examine reveal that the diploma of governance compliance in banks considerably explains their soundness degree. Non-adherence to governance ideas can undermine the soundness of the banking system.

6. An emphasis solely on stringent compliance with board attributes with out due consideration to different vital facets of governance, together with danger administration and audit features, can have implications for financial institution soundness. In all, the examine reveals that conventional fairness governance ideas not solely decide financial institution soundness in India, however compliance with debt governance requirements additionally assumes an vital function in figuring out financial institution soundness, notably within the aftermath of 2014.

(Yogesh Dayal)     
Chief General Manager

Press Release: 2022-2023/733