Navigating the interplay of legal frameworks and corporate governance: the impact on asset quality in an emerging economy

Abstract

This study examines the impact of regulatory changes on seven distinct corporate governance determinants of asset quality in Indian banks. We focus on the Companies Act of 2013 and the Insolvency and Bankruptcy Code of 2016, two key pieces of legislation that have significantly impacted the Indian banking industry. Using the General Method of Moments, a dynamic panel data method, we analyze data from 45 Indian public and private sector banks from 2010 to 2019. Our results suggest that board functioning contributes more to the reduction of non-performing assets after the passage of the Companies Act. However, the impact of special committee activity, ownership concentration, and intensity of board activities has worsened. As far as the Insolvency and Bankruptcy Code of 2016 is considered, it has reduced the negative impact of special committee activity and board functioning on asset quality. Our study addresses the endogeneity issue, frequently encountered in previous research on corporate governance determinants of asset quality. This study makes a valuable contribution to the literature by providing insights into the impact of regulatory changes on corporate governance determinants of asset quality in Indian banks. Our research also provides a benchmark for other emerging economies to define their legal frameworks. We suggest further study of the factors, particularly board independence and gender diversity in light of the Acts.