An empirical examination of the impact of country‐level corporate governance on profitability of Indian banks

Abstract

AbstractThe main aim of the present study is to examine the impact of country‐level corporate governance on the profitability of Indian banks using a sample of 61 banks that is, 42 private and 19 public banks. The study employs descriptive statistics, correlation analysis, regression analysis of two‐way variable intercept random effect model, and robustness checks including robust regression, Generalized Methods of Moments, and Panel Correction Standard Error. The results reveal that country‐level corporate governance has a significant impact on the profitability of Indian banks. Private banks demonstrate better performance over public banks and the effect of country‐level governance on the profitability of private banks is positive and it is better than public banks. Further, the results show that demonetisation has a significant negative impact on the profitability of Indian banks as measured by Return on Assets and Return on Equity, but it also has a significant positive effect in the case of Net Interest Margin. The findings of the current study have considerable implications for regulators, policymakers, bankers, analysts, and academicians. Regulations and several policy measures could be introduced to improve the profitability of Indian banks. To promote greater transparency, better accountability, strong rule of law, and corporate governance, corruption must be eliminated to enhance higher profitability of Indian banks. This paper presents novel evidence linking country‐level corporate governance to the profitability of banks in the context of India, as an emerging economy. Therefore, it bridges an existing gap in the body of literature on the profitability of banks in India.