DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW

BANKING LAW

FINAL DRAFT

ON

CORPORATE GOVERNANCE IN BANKING SECTOR: CONCEPTS & ISSUES

SUBMITTED TO: - SUBMITTED BY :-

Dr. SHASHNAK SHEKHAR SURYANSH SINGH
ASSISTANT PROFESSOR OF LAW B.A LL.B (HONS.), SEM-VI

ROLL NO.-154, SEC-B

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 ACKNOWLEDGEMENT

This project titled Corporate Governance in Banking Sector: Concepts and Issues has
been prepared for fulfilment of project on Banking Law which forms the part of curriculum
of the study in Dr. Ram Manohar Lohiya National Law University.

I am very thankful to Dr. Shashank Shekhar without whose kind co-operation the
project would not have been completed.

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 TABLE OF CONTENTS

1. Introduction.......................................................................................................(4)
2. Concept Background of Corporate Governance............................................(4)
3. Need for corporate governance in banking sector..........................................(6)
4. Corporate Governance in developing economies............................................(8)
5. Evolution of corporate governance in banking in India................................(9)
6. Role of central bank in Corporate Governance..............................................(12)
7. Conflict of interest: Compliance and its contribution to corporate governance
in banking sector...............................................................................................(13)
8. Suggestions for the proper implementation of Corporate Governance in
banking sector in developing economies.........................................................(15)
9. Conclusion..........................................................................................................(16)
10. Bibliography.......................................................................................................(17)

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INTRODUCTION:- The term “Corporate Governance” in the Banking sector has become an
all-pervasive term in the recent decade. Banking system plays a very important role in the
economic life of the nation. The health of the economy is closely related to the soundness of
its banking system. Banks figure out a decisive bonding between its financial system and
overall financing needs of all other sectors of business of the economy and hence the well-
being of banking sector is imperative. 1 The Indian banking system is among the healthier
performers in the world. In the liberalized economic environment and integration of the
country, in to world market the corporate sector in India at present cannot ignore the
importance of Corporate Governance2.Weakness in the banking system can threaten financial
stability both within the country and globally. The considerable renovation of the Indian
banking sector is palpable from the modernization taken place in the financial markets,
institutions and variety of financial products after globalization of Indian economy. Sharing
of resources at International level and the entry of international new products has influenced
the market to remain competitive globally. These circumstances ensure Indian banks to cope
up with the changing environment by establishing good corporate governance practices only.3

CONCEPT BACKGROUND OF CORPORATE GOVERNANCE:- The seeds of

modern corporate governance were probably sown by the Watergate scandal in the USA.
Subsequent investigations by US regulatory and legislative bodies highlighted control
failures that had allowed several major corporations to make illegal political contributions
and bribe government officials. While these developments in the US stimulated debate in the
UK, a spate of scandals and collapses in that country in the late 1980s and early 1990s led
shareholders and banks to worry about their investments. Several companies in UK which
saw explosive growth in earnings in the ’80s ended the decade in a memorably disastrous
manner. Importantly, such spectacular corporate failures arose primarily out of poorly
managed business practices.
This debate was driven partly by the subsequent enquiries into corporate governance (most
notably the Cadbury Report) and partly by extensive changes in corporate structure. In May
1991, the London Stock Exchange set up a Committee under the chairmanship of Sir Adrian
Cadbury to help raise the standards of corporate governance and the level of confidence in

1
Mitesh Dadhania & Sanjay Bhayani, Corporate Governance & Financial Performance: Comparative Study of
Indian Banking and I.T Firms, Gujarat Technological University Journal.(4)
2
Ankit katrodia, Corporate Governance Practices in Banking sector, Abhinav Journal of research in Commerce
and Management, Vol No.1, Issue No.4, (2)
3
Supra at 1, pp-3

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financial reporting and auditing by setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is expected of them. The Committee
investigated accountability of the Board of Directors to shareholders and to the society. It
submitted its report and the associated ‘code of best practices’ in December 1992 wherein it
spelt out the methods of governance needed to achieve a balance between the essential
powers of the Board of Directors and their proper accountability. Being a pioneering report
on corporate governance, it would perhaps be in order to make a brief reference to its
recommendations which are in the nature of guidelines relating to, among other things, the
Board of Directors and Reporting & Control. The Cadbury Report stipulated that the Board
of Directors should meet regularly, retain full and effective control over the company and
monitor the executive management. There should be a clearly accepted division of
responsibilities at the head of the company which will ensure balance of power and authority
so that no individual has unfettered powers of decision. The Board should have a formal
schedule of matters specifically reserved to it for decisions to ensure that the direction and
control of the company is firmly in its hands. There should also be an agreed procedure for
Directors in the furtherance of their duties to take independent professional advice4.

OECD defined Corporate Governance as, "Corporate governance specifies the distribution of
rights and responsibilities among different participants in the corporation, such as the board,
managers, shareholders and other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also provides the structure through
which the company objectives are set, and the means of attaining those objectives and
monitoring performance.” In its most recent corporate governance report, the OECD
emphasized the important role that banking and financial supervision plays in developing
corporate-governance standards for financial institutions. Consequently, banking supervisors
have a strong interest in ensuring effective corporate governance at every banking
organization. Supervisory experience underscores the necessity of having appropriate levels
of accountability and managerial competence within each bank. Essentially, the effective
supervision of the international banking system requires sound governance structures within
each bank, especially with respect to multi-functional banks that operate on a transnational
basis. A sound governance system can contribute to a collaborative working relationship
between bank supervisors and bank management5.

4
Cadbury, Sir Adrian Committee on the Financial Aspects of Corporate Governance (1992)
5
Org. for Econ. Co-operation & Dev., Survey of Corporate Governance Developments in OECD Countries 12,
http://www.oecd.org/dataoecd/58/27/21755678.pdf (2002)

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 The Cadbury Report generated a lot of interest in India. The issue of corporate governance
was studied in depth and dealt with by the Confederation of Indian Industries (CII),
Associated Chamber of Commerce and Industry (ASSOCHAM) and Securities and
Exchange Board of India (SEBI). These studies reinforced the Cadbury Report’s focus on the
crucial role of the Board and the need for it to observe a Code of Best Practices. Co-
operative banks as corporate entities possess certain unique characteristics. Paradoxical as it
may sound, evolution of co-operatives in India as peoples’ organisations rather than business
enterprises adopting professional managerial systems has hindered growth of
professionalism in co-operatives and proved to be a neglected area in their evolution6.

The first initiative for ensuring corporate governance among Indian companies came from
the corporate sector itself. The Confederation of Indian Industry (CII) came up with the Code
of Desirable Corporate Governance in 1998. Then the Securities Exchange Commission of
India (SEBI) which is the regulator of Indian financial market, appointed 'Kumaramangalam
Birla Corporate Governance Committee'. Most of the recommendations made by the
Committee were accepted and implemented by SEBI in the year 2000.

NEED FOR CORPORATE GOVERNANCE IN BANKING SECTOR-

Banks figure out a decisive bonding between its financial system and overall financing needs
of all other corporate sectors and the whole of the country and hence the well being of
banking firms is imperative for any economy. The need for corporate governance in financial
sector cannot be ignored and especially in the banking sector because this is the sector which
thrives on trust the most7. Banks form the integral part of the economy of the country and any
discrepancy in the banking sector may have a direct bearing on the financial health of the
country. Banks help in channelizing the people’s savings 8. Banks are also incorporated
entities just like any other organization so primary rules of corporate governance apply to
banks but in addition to these certain other features also apply for the corporate governance
of banks. Corporate governance helps in averting banking crisis; it helps in promoting sound
financial system. Governance in banks is a considerably more complex issue than in other
sectors. Banks will attempt to comply with the same codes of board governance as other
6
V. Leeladhar, Corporate Governance in Banks, pp-3
7
. The need for Corporate Governance in averting banking crises - Lessons from the Banco Latino Crisis-.Speech
delivered by Drs. Alberto G. Romero; Executive Director Bank van de Nederlandse Antillen at the KPMG
banking seminar in the Dominican Republic. (October 2, 2003)
8
Stiglitz J.E., “Reforming the Global Financial Structure: Lessons from Recent Crises” Journal of Finance Vol.
154, pp. 508-1522, (1999)

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companies but, in addition, factors like risk management, capital adequacy and funding,
internal control, and compliance all have an impact on their matrix of governance.
Governance is also a curiously two-sided issue for banks since their funding and, often,
ownership of other companies makes them a significant stakeholder in their own right. The
Board of Directors stands at the heart of many systems and structures encompassing the
totality of corporate governance.
Basel Committee has emphasised that banking supervision cannot function well if sound
corporate governance is not in place. It can be ensured by having appropriate levels of
accountability, and checks and balances within each bank. Sound corporate governance can
contribute to a collective working relationship between bank management and bank
supervisors. The Basel committee has further underscored the need for banks to set strategies
for their operations and establish accountability for executing these. In addition, transparency
of information related to accountability in that it gives market participants sufficient
information with which to judge the management of a bank 9. The guidance of Basel
committee refer to a management structure composed of a board of directors and senior
management. The committee recognises that there are significant differences in the legislative
and regulatory framework across countries as regards the functions of board of directors and
senior management. The notions of board of directors and senior management in the context
of a bank are taken to represent two decision making units10. The large number of
stakeholders (such as employees, customers, suppliers etc), whose economic well-being
depends on the health of the banking industry, depend on appropriate regulatory practices and
supervision. Indeed, in a healthy banking system, the supervisors and regulators themselves
are stakeholders acting on behalf of society at large. Their primary function is to develop
substantive standards and other risk management procedures for financial institutions in
which regulatory risk measures correspond to the overall economic and operational risk faced
by a bank. Accordingly, it is imperative that financial regulators ensure that banking and
other financial institutions have strong governance structures, especially in light of the
pervasive changes in the nature and structure of both the banking industry and the regulation
which governs its activities11.

9
Basel Comm. on Banking Supervision, Enhancing Corporate Governance for Banking Organisations 5,
http://www.bis.org/publ./bcbs56.pdf (Sept. 1999).
10
C.L Bansal, Taxmann’s Corporate Governance Law Practice & Procedure with case studies, Taxmann Allied
Services ltd., (2005) ,pp-520
11
Kern Alexander, Corporate Governance and Banking Regulation, Cambridge Endowment for Research in
Finance, (June 2004) pp-6

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CORPORATE GOVERNANCE IN DEVELOPING ECONOMIES:- From a financial
industry perspective, corporate governance involves the manner in which the business affairs
of individual institutions are governed by their Boards and management. It also includes the
effective management of compliance with applicable laws, regulations, and guidelines. The
focus on corporate governance is particularly acute in financial services and, most of all, in
the banking sector. In developing countries, corporate governance in banks is of supreme
connotation as they play a crucial role in the economy’s financial structure and also act like a
catalyst in the economic growth of the country. The subjective evidence of the 1997 Asian
crisis explains that poor corporate governance collapsed many banks and corporate firms in
many developing countries of Asia. Since then, there has been a sincere effort to strengthen
the corporate governance in the developing countries.12 As we are marching forward towards
global economy, there are many economic issues coming up in the process for developing,
emerging and transitional economies. These can be correctly identified as structural changes
in market institutions. It brought about much awareness among investors, bankers and public
at large. Such economy faced a retarded growth in spite of having economic reform like
privatization, liberalization and lifting licensing raj. Despite flow of money in such economy,
the growth could not take its stand due to unbalanced approach. The holder of para-state‘
institutions such as privatization funds remain in the hands of largest shareholders of
companies. As a result, the de facto power remains loaded in the hands of few individuals
considered as internal owners, while the external owners do not have enough power to
control the companies and thereby can‘t ensure themselves to get appropriate returns.
Another important factor in banking industry in developing countries is that banks are mostly
owned by government. In such situation, banks are mostly guided by government bodies and
many laws based on stereotype procedures. The accountability idea is less apparent as the
concept of government job discourages the spirit of competition. The need for corporate
governance in developing, emerging and transitional economies not only arises from
resolving problems of ownership and control, but also from ensuring transparency in
achieving the desired goal of corporate governance. In many cases, developing and emerging
economies are beset with issues such as the lack of property rights, the abuse of minority
shareholders, contract violations, asset stripping and self-dealing. Ownership pattern,
regulatory environment, societal pressure (on the developmental role of banks) and the broad
structure would be the key elements in the design of a governance framework of banking.
While government ownership does provide core strength to banks, the structural
12
Supra at 1, pp-4

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inefficiencies and lack of management autonomy appears to have weakened the ability of our
banks (Public sector) to compete effectively in the current market situation The corporate
governance may be an effective idea for the divestiture of government ownership 13. Because
where the government has partial or full control of banks then there may be opportunities for
the government as the dominant shareholder to expropriate minority shareholders by using
banks to aid fiscal problems or support certain distributional cartels. Therefore, the question
in this case, is whether or not the government can credibly commit that it won’t expropriate
private capital owners. For instance, in India, the partial divestment of public sector banks
has not brought about any significant changes in the quality of corporate governance
mechanisms. Despite a decade of financial reforms in India, the Government has still a major
role in appointing members to bank boards. Furthermore, although the reforms have given the
public sector banks greater autonomy in deciding the areas of business strategy such as
opening branches and introduction of new products), bank boards have little overall
autonomy, as they are still to follow the directives issued 14. The role of banking sector in
economic growth is even greater in developing economies as their tolerable margin of errors
in resource allocation is small15.

EVOLUTION OF CORPORATE GOVERNANCE IN BANKING IN INDIA:- In the

pre-reform era, there were very few regulatory guidelines covering corporate governance of
banks. This was reflective of the dominance of public sector banks and relatively few private
banks. That scenario changed after the reforms in 1991 when public sector banks saw a
dilution of government shareholding and a larger number of private sector banks came on the
scene. The competition brought in by the entry of new private sector banks and their growing
market share forced banks across board to pay greater attention to customer service. As
customers were now able to vote with their feet, the quality of customer service became an
important variable in protecting, and then increasing, market share. Post- reform, banking
regulation shifted from being prescriptive to being prudential. This implied a shift in balance
away from regulation and towards corporate governance. Banks now had greater freedom and
flexibility to draw up their own business plans and implementation strategies consistent with
their comparative advantage. The boards of banks had to assume the primary responsibility
13
T.G Arun and J.D Turner, Corporate Governance of banks in developing economies: Concepts and Issues,
Institute for Development Policy and Management, (2004), 371-377
14
T.G Arun and J.D Turner ,Public Sector Banks in India: Rationale and Prerequisites for Reform, Annals of Public
and Cooperative Economics, Vol.73, No.1.,(2002a)
15
Regulation, corporate Governance and the Banking Sector- A Political Economy perspective from
Bangladesh, pp-4.

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for overseeing this. This required directors to be more knowledgeable and aware and also
exercise informed judgment on the various strategy and policy choices. Two reform measures
pertaining to public sector banks - entry of institutional and retail shareholders and listing on
stock exchanges - brought about marked changes in their corporate governance standards.
Directors representing private shareholders brought new perspectives to board deliberations,
and the interests of private shareholders began to have an impact on strategic decisions. On
top of this, the listing requirements of SEBI enhanced the standards of disclosure and
transparency. Public sector banks were accorded larger autonomy, to enable them to face the
growing competition. They could now decide on virtually the entire gamut of human
resources issues, and subject to prevailing regulation, were free to undertake acquisition of
businesses, close or merge unviable branches, open overseas offices, set up subsidiaries, take
up new lines of business or exit existing ones, all without any need for prior approval from
the Government. All this meant that greater autonomy to the boards of public sector banks
came with bigger responsibility. A series of structural reforms raised the profile and
importance of corporate governance in banks. The structural reform measures included
mandating a higher proportion of independent directors on the boards; inducting board
members with diverse sets of skills and expertise; and setting up of board committees for key
functions like risk management, compensation, investor grievances redressal and nomination
of directors. Structural reforms were furthered by the implementation of the Ganguly
Committee recommendations relating to the role and responsibilities of the boards of
directors, training facilities for directors, and most importantly, application of fit and proper
norms for directors16.The evolution of corporate governance in banks, particularly, thus
reflects changes in monetary policy, regulatory environment, and structural transformations
and to some extent, on the character of the self-regulatory organisations functioning in the
financial sector17. Among the financial intermediaries, banks occupy a special place due to
their centrality in the transmission of monetary policy and the functioning of the payment and
settlement systems. They also are the beneficiaries of deposit insurance which may weaken
their incentive for strong management monitoring as well as monitoring by other stakeholders
including depositors. Good corporate governance would ensure strong internal controls which
would offset the weakened incentive for monitoring. A robust and stable banking system is
an absolute necessity for a well functioning economy18.
16
Rajat Deb,Corporate Governance Practices in Indian Banks, Journal of Business Management & Social
Sciences Research, Vol.2,No.5, (2003), pp-7
17
Y.V Reddy, Banking Corporate Governance in banks in India, pp-3
18
Address by Mr Anand Sinha, Deputy Governor of the Reserve Bank of India, delivered on his behalf, at the L

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ROLE OF CENTRAL BANK IN CORPORATE GOVERNANCE:- In developing
countries the central bank plays a bigger role in the economy and cannot reasonably be
expected to have a total hands-off approach or be totally independent of government. Central
banking functions in India are carried out by the Reserve Bank of India since independence
by taking over the erstwhile Imperial Bank of India formed in 1935. RBI plays a leading role
in formulating and implementing corporate governance norms for India’s banking sector. The
& T Management Development Centre, Lonavla, (19 March 2013),pp-2.

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ambit encompasses safeguarding and maximizing the shareholders’ value, upholding retail
depositors’ risk and stabilizing the financial system so as to conserve the larger interests of
the public. This role becomes important in view of the fact that in India Bank assets often
lack transparency and liquidity because most bank loans, unlike other products and services,
are customized and privately negotiated. RBI performs corporate governance functions under
the guidance of Board for Financial Supervision (BFS). BFS inspects and monitors banks
using the ‘CAMELS’ approach (Capital adequacy, Asset quality, Management, Earnings,
Liquidity and Systems & Controls). These corporate governance norms follow a three
pronged approach of a) Disclosure and transparency, b) Off-site surveillance, c) Prompt
corrective action.19 RBI ensures corporate governance through the regulatory mechanism of
prudential lending norms and monitoring use of money etc.
In developing countries the central bank plays a bigger role in the economy and cannot
reasonably be expected to have a total hands-off approach or be totally independent of
government; it has to nurture hand-hold and actively manage many aspects of the economy.
To that extent a central bank in a developing country plays both a traditional and a non-
traditional role that includes building independent institutions such as capital market, sector
regulators, watchdogs, etc. and plays both a regulatory and a development role. 20 The model
of governance of banks and financial institutions followed by RBI is through prescribing
prudential norms and laying down broad disclosure principles coupled with periodic
surveillance rather than direct interference and micro-managing the banking section of the
economy but at the same time retaining the ultimate objective of strengthening market
institutions to infuse greater transparency and liquidity in financial markets. The monitoring
and oversight mechanism instituted by Reserve Bank of India towards improving corporate
governance of banks and by inference, of individual borrowers is robust and effective. The
mechanisms also promote efficient management of the banking sector in general and are
rewarded by the capital market through increase in shareholder’s equity. RBI is effective as a
regulator of the banking sector and a good gatekeeper of corporate governance. The
governance of banks rests with the board of directors. In the light of deregulation in interest
rates and the greater autonomy given to banks in their operations, the role of the board of
directors has become more significant. During the years, Boards have been required to lay
down policies in critical areas such as investments, loans, asset-liability management, and
management and recovery of NPAs. As a part of this process, several Board level committees

19
Kshama V Kaushik & Rewa P Kamboj, Study on the state of Corporate Governance in India, pp-3
20
Id, pp-7

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including the Management Committee are required to be appointed by banks.

CONFLICT OF INTEREST: COMPLIANCE AND ITS CONTRIBUTION TO

CORPORATE GOVERNANCE IN BANKING SECTOR:- Much of the contemporary
interest in corporate governance is concerned with mitigation of the conflicts of interests
between stakeholders. Ways of mitigating or preventing these conflicts of interests include
the processes, customs, policies, laws, and institutions which have an impact on the way a
company is controlled. An important theme of corporate governance is the nature and extent
of accountability of people in the business. In large firms where there is a separation of
ownership and management and no arises between upper-management (the "agent") which
may have very different interests, and by definition considerably more information, than
shareholders (the "principals"). The danger arises that rather than overseeing management on
behalf of shareholders, the board of directors may become insulated from shareholders and
beholden to management21. Financial markets can be subject to inherent instability, induces
governments to intervene to provide depositor protection in some form or other. To control
the incentives of bank owners who rely too heavily on government funded deposit insurance,
governments typically enforce some control over bank owners. Adequate corporate
governance structures for banking institutions require internal control systems within banks
to address the inherent asymmetries of information and the potential market failure that may
result. This form of market failure suggests a role for government intervention 22. And then
arises the conflict of interest because in the public sector banks this government intervention
may be more and it can affect the interests of the stakeholders.
Government ownership of banks is a common feature in many developing economies. The
reasons for such ownership may include solving the severe informational problems inherent
in developing financial systems, aiding the development process or supporting vested
interests and distributional cartels with a government-owned bank, the severity of the conflict
between depositors and managers very much depends upon the credibility of the government.
However, if the government is not credible and there is less political stability then the
extensive political intervention in the banking sector also arises conflict of interest and
complicates the issue of bank corporate governance23.
Other kinds of conflict on interests arise whenever the bank’s ability to act exclusively in the

21
Supra at 16, pp-1.
22
Supra at 11, pp-8
23
Supra at 13,pp-11

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best interest of the account beneficiaries or clients is impaired. It occurs whenever a person
(as agent), who is contractually bound to safeguard another party’s (as principal) interest, has
incompatible interests of his own or is oblige or willing to safeguard the conflicting interests
of another principal. The law should set out a clear standard by which agent’s behaviour is to
be judged and similarly these laws and regulations should be complied with to avoid conflict
of interest. The link between good corporate governance and compliance is very close. From
a banking industry perspective, corporate governance involves the manner in which the
business and affairs of banks are governed by their board of directors and senior
management. This affects not only how they set corporate objectives and operate the bank’s
day-to-day business, but ‘align corporate activities and behaviour with the expectation that
banks will operate in a safe and sound manner, and in compliance with applicable laws and
regulations24.
Banks should establish, implement and maintain an effective conflict of interest policy by
way of corporate governance which set out standards of expected behaviour, including,
amongst other matters, the treatment of any non-compliance with the policy. Personal and
business affairs of the directors or major stakeholders should be arranged so as to avoid the
conflict of interest.

24
Anne Peters & Lukas Handschin, Conflict of Interest in Global, Public and Corporate Governance,Cambridge
University Press,pp-256-57

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SUGGESTIONS FOR THE PROPER IMPLEMENTATION OF CORPORATE
GOVERNANCE IN BANKING SECTOR IN DEVELOPING ECONOMIES:- This
paper has argued that the special nature of banking institutions necessitates a broad view of
corporate governance where regulation of banking activities is required to protect depositors.
In developed economies, protection of depositors in a deregulated environment is typically
provided by a system of prudential regulation, but in developing economies such protection is
undermined by the lack of well-trained supervisors, inadequate disclosure requirements, the
cost of raising bank capital and the presence of distributional cartels.
In order to deal with these problems, I suggest that developing economies need to adopt
the following measures. Firstly, liberalisation policies need to be gradual, and should be
dependent upon improvements in prudential regulation. Secondly, developing economies
need to expend resources enhancing the quality of their financial reporting systems, as well as
the quantity and quality of bank supervisors. Thirdly, given that bank capital plays such an
important role in prudential regulatory systems, it may be necessary to improve investor
protection laws, increase financial disclosure and impose fiduciary duties upon bank directors
so that banks can raise the equity capital required for regulatory purposes. A further reason as
to why this policy needs implemented is the growing recognition that the corporate
governance of banks has an important role to play in assisting supervisory institutions to
perform their tasks, allowing supervisors to have a working relationship with bank
management, rather than adversarial one25. I have mentioned that the corporate governance of
banks in developing economies is severely affected by political considerations. Firstly, given
the trend towards privatisation of government-owned banks in developing economies, there is
a need for the managers of such banks to be granted autonomy and be gradually introduced to
the corporate governance practices of the private sector prior to divestment. Secondly, where
there has only been partial divestment and governments have not relinquished any control to
other shareholders, it may prove very difficult to divest further ownership stakes unless
corporate governance is strengthened. Finally, given that limited entry of foreign banks may
lead to increased competition, which in turn encourages domestic banks to emulate the
corporate governance practices of their foreign competitors, I suggest that developing
economies partially open up their banking sector to foreign banks. If the entry of foreign
banks is permitted it may improve the standards of corporate governance.
Banks usually account for lion share of financial system in most of the economies and
this dominance is overwhelming in case of the developing countries that are actually in
25
Supra at 9.

15 | P a g e
greater need of a sound financial system. Turbulence or failures of the banking sector would
push these countries’ economies to serious problems. 26

CONCLUSION:- It has been analysed that the strong corporate governance structure has a
positive impact on the performance of the banks. Financial crisis are not random events, but
are set in motion by the decisions of the individuals and institutions operating within a given
framework of laws, regulations etc., For each financial instrument that becomes a “weapon of
mass financial destruction” or creates an economy wide bubble, there is an underlying failure
of incentives among the executives of banks and other financial institutions, their owners and
creditors, and regulators. Corporate governance has the potential to identify problem spots
where incentives are mismatched in a way that could lead to undesired firm behaviour or
even system wide instability. Corporate governance policies that mandate rather than
motivate information production and disclosure shall be more successful in governing of
banking institutions. In the years to come, the Indian financial system will grow not only in
size but also in complexity as the forces of competition gain further momentum and financial
markets acquire greater depth. The growth of efficient corporate governance in banking
sector, especially in a developing economy like India, has been partly held back due to weak
legal protection, poor disclosure prerequisites and overriding owners. The real success of
our financial sector reforms will however depend primarily on the organizational
effectiveness of the banks, including cooperative banks, for which initiatives will have to
come from the banks themselves.

BIBLIOGRAPHY:-
26
Supra at 15, pp-4

16 | P a g e
 1. Mitesh Dadhania & Sanjay Bhayani, Corporate Governance & Financial
Performance: Comparative Study of Indian Banking and I.T Firms, Gujarat
Technological University Journal.

2. Ankit katrodia, Corporate Governance Practices in Banking sector, Abhinav Journal

of research in Commerce and Management, Vol No.1, Issue No.4

3. Cadbury, Sir Adrian Committee on the Financial Aspects of Corporate Governance

(1992)

4. Org. for Econ. Co-operation & Dev., Survey of Corporate Governance Developments
in OECD Countries 12, http://www.oecd.org/dataoecd/58/27/21755678.pdf (2002)

5. The need for Corporate Governance in averting banking crises - Lessons from the
Banco Latino Crisis-.Speech delivered by Drs. Alberto G. Romero; Executive Director
Bank van de Nederlandse Antillen at the KPMG banking seminar in the Dominican
Republic. (October 2, 2003)

6. V. Leeladhar, Corporate Governance in Banks, pp-3

7. Stiglitz J.E., “Reforming the Global Financial Structure: Lessons from Recent Crises”
Journal of Finance Vol. 154, pp. 508-1522, (1999)

8. Basel Comm. on Banking Supervision, Enhancing Corporate Governance for Banking

Organisations 5, http://www.bis.org/publ./bcbs56.pdf (Sept. 1999).

9. C.L Bansal, Taxmann’s Corporate Governance Law Practice & Procedure with case
studies, Taxmann Allied Services ltd., (2005) ,

10. Kern Alexander, Corporate Governance and Banking Regulation, Cambridge

Endowment for Research in Finance, (June 2004)

11. T.G Arun and J.D Turner, Corporate Governance of banks in developing economies:
Concepts and Issues, Institute for Development Policy and Management, (2004), 371-
377

12. T.G Arun and J.D Turner ,Public Sector Banks in India: Rationale and Prerequisites
for Reform, Annals of Public and Cooperative Economics, Vol.73, No.1.,(2002a)

13. Regulation, corporate Governance and the Banking Sector- A Political Economy
perspective from Bangladesh,

14. Rajat Deb,Corporate Governance Practices in Indian Banks, Journal of Business

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