Financial Sector Reforms and Corporate Governance of Banks in Developing Economies: The Indian Experience

Abstract

The corporate governance of banks in developing economies is important, if for no other reason than the prevalence and severity of banking instability in many of these economies. In India, although the issues of corporate governance have not received much attention in the first generation of financial sector reforms, this issue will become a natural choice in the second set of reforms. The article finds that the partial divestment of Public Sector Banks (PSBs) has not brought about any significant changes in the quality of corporate governance mechanisms. This study also confirms the urgent need to review the size and composition of the PSB boards in India, particularly on adequate board-level representation for private shareholders when there is mixed ownership between the government and the private sector. The considerations of the Government of India (GOI) in making board-level appointments and the degree of transparency in the appointment process requires adequate attention. The issues of limited operational autonomy and inadequate representation for private shareholders in the boards could affect the recapitalization strategy of PSBs.