A non-parametric framework for evaluating governance–efficiency–productivity associations in commercial banking
ISSN: 0144-3585
Article publication date: 5 October 2021
Issue publication date: 20 September 2022
Abstract
Purpose
Against 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/approach
The 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.
Findings
The 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/value
The 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.
Keywords
Acknowledgements
The authors would like to thank the editor-in-chief, Prof. M. Bahmani-Oskooee and two anonymous reviewers for their time and valuable suggestions. Navendu Prakash would also like to acknowledge the financial support (Junior Research Fellowship) of the University Grants Commission, India.
Funding: Navendu Prakash receives Junior Research Fellowship (JRF) from University Grants Commission (UGC), India as part of his Ph.D. program. However, UGC had no involvement in the study design; in the collection, analysis and interpretation of data; in the writing of report; and in the decision to submit the article for publication.
Citation
Prakash, N., Singh, S. and Sharma, S. (2022), "A non-parametric framework for evaluating governance–efficiency–productivity associations in commercial banking", Journal of Economic Studies, Vol. 49 No. 7, pp. 1159-1180. https://doi.org/10.1108/JES-06-2021-0273
Publisher
:Emerald Publishing Limited
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