A non-parametric framework for evaluating governance–efficiency–productivity associations in commercial banking

Abstract

PurposeAgainst the backdrop of an Indian banking sector that finds itself entangled in the triple deadlock of increasing competition, technological changes and strict regulatory compliance, the study aims to examine the need for reinforcing stringent corporate and risk governance mechanisms as an instrument for improving efficiency and productivity levels.Design/methodology/approachThe authors construct three separate indices, namely, supervisory board index, audit index and risk governance index to measure the governance practices of commercial banks. A slacks-based data envelopment analysis technical efficiency (TE) measure, a variable returns to scale cost efficiency model and Malmquist productivity index are employed to determine TE, cost efficiency and productivity change, respectively. A two-step system-generalized method of moments estimation accounts for the dynamic relationship between governance and efficiency.FindingsThe authors show that strict audit and risk governance mechanisms are associated with better efficiency and productivity levels. However, consistent with the free-rider hypothesis, large, independent and diverse boards lead to cost inefficiencies. Strict risk governance structures circumvent the negative effects of high regulatory capital and improve efficiency and total factor productivity. However, friendly boards do not perform efficiently in the presence of regulatory capital, implying that incentives arising from maintaining high levels of equity capital make them more susceptible to risk-taking, and board composition is unable to sidestep this behaviour.Originality/valueThe paper contributes to the literature that explores the linkages between governance, efficiency and productivity. The inferences hold relevance in the post-COVID world, as regulators try to circumvent the additional stress on the banking system by adopting sound corporate and risk governance mechanisms.

Audit Committee Independence, Director Ownership, Audit Quality and Non-Performing Loans

“…Further, we explore the impact of external audit quality on NPLs. We find that external audit quality (AQ) has significant negative impact on the NPLs (see also Chowdhury 2012;Prakash et al 2021). It reveals that quality audit can reduce NPLs, identified as white collar crime in banking industry of Bangladesh (see also Ghosh et al 2020).…”

“…AUDIT COMMITTEE INDEPENDENCE AND NPLs Ghosh et al (2020) identified that the lack of proper monitoring and nepotism have significant positive impact on NPLs in Bangladesh. Evaluating relationship between governance and efficiency, Prakash et al (2021) found that strong risk governance frameworks impede the adverse consequences of high regulatory capital and expand efficiency. Next, Fiador and Sarpong-Kumankoma (2021) found that a large board comprising experts and non-executive members can contribute to the bank loan quality.…”

“…Analyzing a systematic literature survey, Tarchouna et al (2021b) concluded that most studies show the factors affecting NPLs particularly from bank-specific and macroeconomic perspectives. In some cases, corporate governance mechanisms are largely linked with bank loan quality (Switzer & Wang 2013;Fiador & Sarpong-Kumankoma 2021;Prakash et al 2021). Thus, there is no consensus regarding the influence of corporate governance attributes on NPLs (Tarchouna et al 2021a).…”

“…Assuming the potency of internal and external independent control and supervisory mechanisms, this paper works to identify the impact of audit committee independence and external audit quality on NPLs. Audit committee independence has significant impact on NPLs (Prakash et al 2021;Tarchouna et al 2021a). Unfortunately, Ghosh et al (2020) argued that in Bangladesh, independent directors can be mockingly described as dependentindependent directors.…”

“…However, taking decision about the unwillingness to pay loans by the borrowers is complex due to the existence of social, psychological, and political issues in this tendency (Ghosh et al 2020). Hence, we demand for an appropriate governance and control framework, recommended in many literature (such as, Chowdhury 2012;Prakash et al 2021;Tarchouna et al 2021a), in controlling NPLs arising from unwillingness to pay, mostly classified as a white collar crime. Therefore, this paper explores the impact of audit committee independence, director ownership, CEO power, audit quality and bank size along with several bank-specific and macroeconomic control variables on the NPLs.…”