CORPORATE GOVERNANCE AND THE PERFORMANCE OF SMALL FINANCE

BANKS IN INDIA
1
Dr.P.Jesintha - Assistant Professor, SKASC, jesi.jesintha@gmail.com
2
Dr.K.Nalini - Assistant Professor, SKASC, nalinik@skasc.ac.in
3
Keerthikesan - Student,SKASC, keerthikesan24@gmail.com
4
Ranjith.A - Student,SKASC, ranjitra2328@gmail.com
5
shruthipandey - Student,SKASC, skrutik1233@gmail.com
6
Dr.Excelce A J,Assistant Professor, Kristu Jayanti College, aj.excelce@kristujayanti.com

Abstract
Corporate Governance may be defined as a set of systems, processes and principles
which ensure that an organization is governed in the best interest of all its stakeholders. It
entails promoting fairness, transparency, and accountability. Effective corporate governance
practices are essential to achieving and maintaining public trust and confidence in the
banking system, which are critical to the proper functioning of the banking sector and the
economy as a whole. From a banking industry perspective, corporate governance involves the
manner in which the business and affairs of banks are governed by their Boards of Directors
and senior management and which directly affects how they function. The expansion of
Small Finance Banks in India aims to provide access to bank credit and services to unbanked
and under-banked regions of India. Sound corporate governance, as it is an essential element
in the safe and sound functioning of a bank. The majority of banks and financial institutions,
owned, managed and influenced by the government with neither high quality management
nor any exemplary record of practicing. Corporate governance have realized the importance
of adopting better practices to protect their depositors and the banking public.

This made the researcher to review the previous literature on the corporate
governance and it is found that only fewer researches are there in the banking sector on
corporate governance. Hence the present research is to find out how corporate governance in
banks has a significant impact on the bank performance in Small finance banks in India. So
the researcher has undertaken the study entitle “Corporate Governance and the performance
of small finance banks in India” with the following objectives.
CORPORATE GOVERNANCE AND THE PERFORMANCE OF SMALL
FINANCE BANKS IN INDIA
“It is better for a city to be governed by a good man than good laws” – Aristotle.

1
Dr.P.Jesintha - Assistant Professor, SKASC, jesinthap@skasc.ac.in
2
Dr.K.Nalini - Assistant Professor, SKASC, nalinik@skasc.ac.in
3
Keerthikesan - Student,SKASC, keerthikesan24@gmail.com
4
Ranjith.A - Student,SKASC, surabhir22bbi047@skasc.ac.in
5
shruthipandey - Student,SKASC, surabhir22bbi047@skasc.ac.in
6
Dr.Excelce A J,Assistant Professor, Kristu Jayanti College, aj.excelce@kristujayanti.com

INTRODUCTION

Banks, in a board sense, are institutions whose business is handling other people’s
money. Banks play a vital role in the economy and the continued strength and stability of the
banking system is a matter of general public interest and concern both in regard to its
linkages with the real sector and for providing a payment and settlement system. Banking
services to the underserved and unserved sections of the population is a challenge; there is
merit in considering access to bank credit and services through expansion of small banks in
unbanked and under-banked regions. small finance banks can play an important role in the
supply of credit to micro and small enterprises, agriculture and banking services in unbanked
and under-banked regions in the country, the RBI has decided to license new “small finance
banks” in the private sector. While permitting small banks, however, the issues relating to
their size, capital requirements, area of operations, exposure norms, regulatory prescriptions,
corporate governance and resolution need to be suitably addressed in the light of experience
gained.

SMALL FINANCE BANK

Small Finance Banks are the financial institutions which provide financial services to the
unserved and unbanked region of the country. They are registered as a public limited
company under the Companies Act, 2013.

 The main purpose behind having small finance banks is to expand access to financial
services in rural and semi-urban areas. These banks can do almost everything that a
normal commercial bank can do but at a much smaller scale.

 It will offer basic banking services, accept deposits and lend to underserved sections
of customers, including small business units, small and marginal farmers, micro and
small industries, and even entities in the unorganized sector
  Small finance banks have the potential to provide an alternative to some of the
existing institutions with their mandated focus on small and medium businesses, the
informal sector, small and marginal farmers and thus on increasing financial inclusion
and serving a variety of unserved clients in the hinterland and tier three and four cities
and towns.

CORPORATE GOVERNANCE
Corporate governance can be understood as the relationship between the shareholders,
stakeholders, and the organization’s management. For an effective system of corporate
governance, there has to be transparency between the shareholders, stakeholders, and
management of the organization.

Globalization and Privatisation have affected all businesses in the country. This has
also lead to the development of financial structures in the country. With the development
of financial technologies, various intricacies are present in the banking system of the country.
Due to this, there is a need for a proper framework for Corporate Governance for Banks.

Corporate Governance may be defined as a set of systems, processes and principles

which ensure that an organization is governed in the best interest of all its stakeholders. It
entails promoting fairness, transparency, and accountability. Good governance is one which
is accountable, transparent, responsive, equitable and inclusive, effective and efficient,
participatory and which follows the rule of law. Effective corporate governance practices are
essential to achieving and maintaining public trust and confidence in the banking system,
which are critical to the proper functioning of the banking sector and the economy as a
whole. From a banking industry perspective, corporate governance involves the manner in
which the business and affairs of banks are governed by their Boards of Directors and senior
management and which directly affects how they function.

STATEMENT OF THE PROBLEM

In current time, banking sector financial crisis is common issues around the world. One of the
major reasons behind this problem is an inadequate practice of corporate governance. Corporate
Governance is the technical, process and relations by which organization are regulated and directed
towards the wealth maximization of shareholders. All organization should have practiced good
corporate governance (Steger and Amann, 2008). A lot of studies have on corporate governance but
few on small finance banking corporate governance. Small Finance Banks in India are a specific
segment of banking created by RBI, A majority of our population lives in rural areas. It is a challenge
to extend banking services to the remotest locations in India.
The expansion of Small Finance Banks in India aims to provide access to bank credit and
services to unbanked and under-banked regions of India. Sound corporate governance, as it is an
essential element in the safe and sound functioning of a bank. The majority of banks and financial
institutions, owned, managed and influenced by the government with neither high quality
management nor any exemplary record of practicing. Corporate governance have realized the
importance of adopting better practices to protect their depositors and the banking public.
This made the researcher to review the previous literature on the corporate governance and it
is found that only fewer researches are there in the banking sector on corporate governance. Hence the
present research is to find out how corporate governance in banks has a significant impact on the bank
performance in Small finance banks in India. So the researcher has undertaken the study entitle
“Corporate Governance and the performance of small finance banks in India” with the following
objectives.

OBJECTIVE OF THE STUDY

i. To assess the Influence of Independent director on the performance of select Banks
ii To analyze the relationship between board and performance of small finance banks

METHODOLOGY
Research Design
The Researcher categorize the study period into before RBI approval (2012 – 2017)
and after approval (2017 – 2022). A detailed conceptual study was undertaken for the
selected small finance banks for the period before approval given by RBI and analytical
study was also done by the researcher for the period after approval given by the RBI.

Data
Secondary Data was collected to understand the concept of Corporate Governance
and Financial performance both in general and specifically related to the Banking Industry.
The following sources were used to collect secondary data.
 Libraries
 E-Resources and Subject Literature

Sample size and Technique

Sample unit
The sample unit comprises of 12 banks, in which 10 banks were chosen for the study.
Sample Size
Since 2015, the RBI has issued licenses to ten entities which include MFIs, NBFCs and
LABs which then initiated the process of converting into SFBs. Their growth is therefore
measured from the year 2016-17. The sample sizes are, however, limited to 10 banks and
are list below.

Year Name of Bank No. of SFBs

Capital SFB (24th April 2016 )
Equitas SFB (5th September 2016)
2016-17 Utkarsh SFB (23rd January 2017) 6
Suryoday SFB(23rd January 2017 )
Ujjivan SFB (1st February 2017)
ESAF SFB(17th March 2017)
AU SFB(19th April 2017)

2017-18 Fincare SFB ( 21st July 2017 ) 4

North East SFB ( 31st March 2017)
Jana SFB (28th March 2018)
 Shivalik SFB (April 26, 2021.)
2021-22 2
Unity SFB ( 1 November 2021 )

Variables used in the study

The variables taken for the study are of two types; they are corporate
governance and bank performance variables.
Corporate governance variables
The corporate governance variables like board size, outside and inside
directors (for board composition), meeting per year (board functioning), bankage, deposits,
audit committee, risk committee, shareholders grievance committee and executive
management committees (board sub committees), meeting attend by directors (board sub
committees functioning)

Performance variables
The Performance variables like return on equity, return on asset, net interest
margin, interest spread, business per employee, profit & loss per employee, net non
performing asset and loan.

Tools used for analysis

 Descriptive Statistics
 Multiple Regression Analysis
 Correlation

Independent Directors and Non-Performing Assets (NPA)

Independent directors play a significant role in addressing and mitigating the issue of
Non-Performing Assets (NPAs) in banks. NPAs are loans or advances that have stopped
generating income for the bank due to default in repayment by borrowers. Independent
directors provide oversight and contribute to the risk management practices of banks,
including the identification and management of NPAs. Independent directors ensure that
appropriate risk management practices are in place to minimize the occurrence of NPAs and
mitigate their impact on the bank's financial health.
H0: There is no impact of independent directors on NPA among SFBs.
Table 1.1: Model Summary of Regression

Independent Variables Multiple R R2 Value F Value Sig.

Company Director
Board of Director
Average meeting 0.687 0.472 107.071 0.000**
Board Meeting
NPA
Source: Secondary Data
The above table 1.1 illustrates the components of independent variables & dependent
variables along with the results obtained from the regression analysis. The multiple R (0.687),
R2 shows (0.472), (F = 107.071) significant at 1 per cent level.

Table 1.2: Variables in the Multiple Regression Analysis

Unstandardized Standardized
Variables SE of B t value P value
co-efficient co-efficient
Constant -.318 .184 -1.726 .085
Company Director .355 .046 .283 7.673 .000**
Board of Director .288 .043 .258 6.743 .000**
Average meeting .108 .038 .103 2.827 .005**
Board Meeting .127 .039 .115 3.249 .001**
NPA .158 .040 .145 3.960 .000**
Source: Computed from Primary data. ** denotes significant at 1 per cent. * Denotes significant at 5 per
cent.

Table 1.2 explains the multiple correlation coefficient is 0.687 measures the degree of
relationship between the actual values and the predicted values of the performance variables.
Because the predicted values are obtained as a linear combination of Board of Directors,
Company Directors, Average meetings, Board meetings, and the coefficient value of 0.687
indicates that the relationship between independent directors and the five independent
variables is quite strong and positive.
The multiple regression equation is
Y = -0.318 + 0.355COD + 0.288BOD + 0.108AM + 0.127BM+ 0.158NPA
The key findings state that based on standardized coefficient, company directors
(0.355) is the most important variable when influenced by independent directors on the
performance variables. In this case, the independent director has not much influence on the
performance variable (Net Profit).
Performance Indicator and Board Size
A performance indicator or key performance indicator (KPI) is a type of performance
measurement. KPIs evaluate the success of an organization or of a particular activity.

H0: There is no difference in mean between performance indicators & board size.

Table 1.3: Performance Indicator and board size

Board Size Sum of Squares df Mean Square

Variables
Between Groups 4.149 2.688 .013*
ROA
Within Groups 1.543
Between Groups 62.672 .951 .500
CAR
Within Groups 65.930
Between Groups 54.705 .777 .650
ROE
Within Groups 70.392
Source: Secondary Data
CONCLUSION
Banking sector plays a significant role in India to transform economy towards self
sufficiency hence the corporate governance of the banking sector is significantly important.
There is a need for the development of new policy framework on corporate governance as
well as the proper implementation of existing laws, regulations and guidelines with the equal
participation of all relevant stakeholders. Corporate governance has become a topic of
increasing interest among the policy makers since it looks at the relationship between the
board of directors, shareholders and management.
The various types of directors functioning in the small finance banks involved in
corporate governance comprise of independent directors (ID), Company director (COM),
Board of Directors (BOD), Number of meetings, male and female. The research finding
shows that the corporate governance in small finance bank has a significantly positive impact
on the bank performance. It also indicated that the non executive director’s proportion has
also major impact on the bank performance. Board meeting enhances the corporate
governance disclosure level but the board committee does not have major impact on the
corporate governance disclosure level.
Practice of good governance is important for the better performance of the banks as
can be seen from the analysis of shareholder’s perspectives which shows that high disclosure
and stronger enforcement is required for better governance in the bank.
It can be inferred that though RBI keeps issuing guidelines to improve the corporate
governance norms in India, the onus to follow the same lies with the individual banks in
order to compete in the global market. The study concludes that there is substantial scope for
improvement in the corporate governance disclosures in all the banks.