Board characteristics and banks profitability: empirical evidence from India

The present paper seeks to examine the association between board characteristics and banks profitability. The study is based on convenience sampling of 10 Indian banks for the period from 2010 to 2019. Banks profitability is measured by return on assets, return on capital employed, profit after tax and return on net worth, while board of directors’ characteristics is measured by board of directors’ size, board of directors’ composition, board of directors’ diligence, board executive directors and board promoters. The study is used leverage, size, and liquidity as controlling variables. Fixed and random effects models are used for analyzing the data. The findings revealed that Total board size positively and significantly impacts return on assets, Return on capital employed, Profit after detecting tax and Return on net worth, while percentage of promoter negatively and insignificant impacts return on assets, Return on capital employed, profit after detecting tax and Return on net worth. The present study contributes to the existing literature by examining the impact of board characteristics which includes board promoters and executive directors on Indian banks profitability.


Introduction
In the last two decades, the international banking sector has undergone significant structural reforms and the behavior of banks with a stronger focus on profitability and rigorous asset management has changed dramatically in recent years (Mirzaei, et al.2013).the Indian banking system is divided generally into five categories: In the second schedule of the Reserve Bank of India (RBI) Act,1934, public sector banks (PSBs), private sector banks, international banks, regional rural banks (RRBs) and cooperative banks are included (Kumar& Prakash, A. 2019). The report of RBI (2017) indicated that the profitability of banks has largely improved due to an improvement in net interest margins and a lower provisioning rate for stabilizing non-performing loans. Corporate governance refers to the procedures and processes by which the board of directors and senior management are directed and managed by their CEO, and the literature emphasizes the fact that the board of directors is an important and highly efficient internal corporate governance system and fulfils two important corporate functions: executive oversight and providing business resources and evaluation for the sector (Martínez &Álvarez, I. 2020). Sarkar, J., & Sarkar(2018) Observe In the wake of the global financial crisis of 2008, the role of the board of directors in the governance of financial institutions has been increasingly scrutinized by both policymakers and academics. While globalization has also accelerated the transfer of values, ideas and business practices around the world, and mainly related to the movement of capital and goods, corporate governance concerns gained a worldwide audience in 2001 with the dramatic fall of Enron, and suddenly the board of directors of several underperforming businesses were reluctantly put into the spotlight. (Kaymak, T., & Bektas, E. 2008) Thus, in view of the above, the objective of this paper is to study the association between board characteristics and banks profitability, the present study contributes to the existing literature by examining the impact of board characteristics which includes board promoters and executive directors on Indian banks profitability. This article is structured as follows: Section 2 introduces some studies in the literature of board characteristics and banks profitability; Section 3 provides Research design; Section 4 exhibits the discussion of the results; Section 5 concludes and provides Conclusion.  Gafoor et al. (2018) explored the impact on bank efficiency of board structure characteristics such as board size, independence and CEO duality. They explored also a substantial link between the size of the board and the output of the bank when the size of the board is between 6 and 9. A positive and critical correlation between board independence and bank performance is also found. Naseem, M. A et al. (2017) stated the size of the board, the number of meetings and the independence of the board are essential features of corporate governance to create a connection with the disclosure of corporate social responsibility. Endrikat, J et al. (2020) boards of directors control organizational policy and decision-making through management oversight and the provision of resources. Shukla, A.et al. (2018) indicated that only three out of ten board characteristics (average number of boards served, the duality of the CEO and number of meetings held) had a positive effect on Indian banks' market performance. While board size and board occupancy are positively linked to discretionary accruals, board independence and independence of the audit committee and discretionary accruals have a negative relation (Kapoor, N., & Goel, S. 2016). Rachdi, H., and Ameur, I. G. B. (2011) report that small bank board is related to a lot of performance and with more bank risk-taking, the presence of freelance administrators among the board of directors affects negatively the performance, however, has no vital result on the risk-taking, lower chief executive officer possession is associated with lower performance in Tunisian banks, banks with high charter worth are associated with lower ROA and ROE and more bank risk and also the tiny size banks establishments seem to assume lower risks. Gender diversity and the presence of a committee on corporate social responsibility are positively linked to the environmental performance of corporations. This result is consistent with the view that women's educational history, talent, and experience help foster sustainable initiatives for the environment. The presence of a committee on corporate social responsibility represents the dedication of a corporation to sustainable growth (García Martín, C. J., & Herrero, B. 2020). Vitolla, F et al. (2020) suggest additional reasons for identifying directors who are likely to interact broadly and transparently. Integrated reporting is an instrument that investors are constantly looking at with growing interest Therefore, corporations are encouraged to redesign the board of directors in a manner that favors virtuous behavior, including transparency and Companies should designate broader boards of directors capable of better tracking and promoting the production of integrated reports of high quality. Boadi, I.et al (2017) showed that SMEs substantially contribute to the profitability of banks in Ghana. Interestingly, in all the models, transaction costs were negligible in the administration of SME loans. Higher inflation lowers the actual value of the loan and erodes the returns of interest to SMEs on the overall loan. GDP growth, on the other hand, boosts the growth of bank income. The authors conclude that several independent variables have an effect that is different from expected, particularly with regard to ownership, which has a statistically significant positive impact on the profitability of banks. (2020) showed that multiple large shareholders (MLS) appear to decrease bank profitability for both asset returns (ROA) and return on equity under the dispersion hypothesis (ROE). However, an alliance between the first and the second-largest shareholder improves bank profitability only for ROA under the alignment of interests' hypothesis. Karyani, E.et al (2019) stated that board-level RGOV processes and risk management activities have little effect on bank performance. However, the negative impact on the profitability of the management-level RGOV system is in relative contrast to the assumptions of the Basel Committee. The most critical factors that could influence the profitability of banks for all profit measures are cost efficiency, maintaining a high capital adequacy ratio, and improving asset quality. (Mehta, A., & Bhavani, G. 2017). Mashamba, T (2018) Advocates the introduction in emerging market economies of the Basel III liquidity regulations. This evidence contributes to the interaction between regulations on liquidity and the discourse on bank profitability. Saona, P (2016) suggested that steps taken by central banks in the area should be motivated primarily by prudential regulation and oversight tools of conventional short-term monetary policy instruments, as the most efficient means of ensuring that best practices in the local banking sector converge with international benchmarks. The risk of credit and liquidity, the productivity of management, the diversification of companies, the concentration/competition of the industry and the economic growth of both ROAA and ROAE have an effect on bank profitability (Petria, N et al.2015). Explored the impact on bank efficiency of board structure characteristics such as board size, independence and CEO duality. And a substantial link between the size of the board and the output of the bank when the size of the board is between 6 and 9. A positive and critical correlation between board independence and bank performance is also found. small bank board is related to a lot of performance and with more bank risk-taking, the presence of freelance administrators among the board of directors affects negatively the performance, however, has no vital result on the risk-taking, lower chief executive officer possession is associated with lower performance in Tunisian banks, banks with high charter worth are associated with lower ROA and ROE and more bank risk and also the tiny size banks establishments seem to assume lower risks Gender diversity and the presence of a committee on corporate social responsibility are positively linked to the environmental performance of corporations. This result is consistent with the view that women's educational history, talent, and experience help foster sustainable initiatives for the environment. The presence of a committee on corporate social responsibility represents the dedication of a corporation to sustainable growth. Suggest additional reasons for identifying directors who are likely to interact broadly and transparently. Integrated reporting is an instrument that investors are constantly looking at with growing interest. Therefore, corporations are encouraged to redesign the board of directors in a manner that favours virtuous behavior, including transparency. Companies should designate broader boards of directors capable of better tracking and promoting the production of integrated reports of high quality The outcome of the study shows that SMEs substantially contribute to the profitability of banks in Ghana. Interestingly, in all the models, transaction costs were negligible in the administration of SME loans. Higher inflation lowers the actual value of the loan and erodes the returns of interest to SMEs on the overall loan. GDP growth, on the other hand, boosts the growth of bank income The authors conclude that several independent variables have an effect that is different from expected, particularly with regard to ownership, which Has a statistically significant positive impact on the profitability of banks. 3 Boussaada, R and hakimi, A. (2020). Results have shown that board-level RGOV processes and risk management activities have little effect on bank performance. However, the negative impact on the profitability of the management-level RGOV system is in relative contrast to the assumptions of the Basel Committee. 5 Mehta, and Bhavani, G.

2006-2013 panel data
The most critical factors that could influence the profitability of banks for all profit measures are cost efficiency, maintaining a high capital adequacy ratio, and improving asset quality. suggested that steps taken by central banks in the area should be motivated primarily by prudential regulation and oversight tools of conventional short-term monetary policy instruments, as the most efficient means of ensuring that best practices in the local banking sector converge with international benchmarks 8 Petria, N et al. 27

2004-2011 regression
The risk of credit and liquidity, the productivity of management, the diversification of companies, the concentration/competition of the industry and the economic growth of both ROAA and ROAE have an effect on bank profitability.

Research design
This present study relies on secondary data that are extracted from ProwessQ database. Financial data covers 10 years from 2010 to 2019. The study is based on convenience non probability sampling, in which 10 Indian banks were selected for conducting this research. The study uses four profitability measures: return on assets, return on capital employed, profit after tax and return on net worth, while board of directors' characteristics is measured by board of directors' size, board of directors' composition, board of directors' diligence, board executive directors and board promoters. The study is used leverage, size, and liquidity as controlling variables. Fixed and random effects models are used for analyzing the data. Where: (ROA) it = Stands for return on assets I, at time t.

Results and discussion
This section is the core of this research which has been divided into four sub-sections descriptive statistics, correlation matrix, panel diagnostic test and regression analysis.

Panel diagnostic tests
Table5 shows the panel diagnostic tests: Redundant Fixed Effects Tests and Correlated Random Effects -Hausman Test. Redundant Fixed Effects Tests are used to find out wither the models have one or two ways intercept, the tests show that the four models have two ways intercept as long as the Probability value of Cross-section and period is less than 0.05. On the other hand, Hausman Test is used to choose whether to go for random or fixed effect models. The test indicates that random effect model is appropriate for model 1, 2 and 4, while fixed effect model is appropriate for mode 3.

Regression analysis
Results in On the contrary, size has a negative and significant impact on the profitability measured by return on assets.
Regarding return on capital employed model, results in table7 demonstrate the findings of model 2 that examines the impact of board of directors' characteristics on capital employed of Indian banks.
Results of random effect model show that the R 2 and adjusted R 2 are fairly good, R 2 is 0.53 which means that 0 0.53 of the variation in return on capital employed of Indian banks is attributable jointly by board of directors' size, board of directors' composition, board of directors' diligence, board executive directors, board promoters, leverage, size, while the rest of variation in return on capital employed of Indian banks can be explained by another variables which are not included in this study. It is clear from table7that TBS and BD has a positive and significant impact on return on capital employed of Indian banks. On the contrary, BC, PEX, SIZE and CR have a negative and significant impact on the profitability measured by return on capital employed.
Regarding profit after tax model, results in table7demonstrate the findings of model 3 that examines the impact of board of directors' characteristics on profit after tax model of Indian banks. Results of fixed effect model show that the R 2 and adjusted R 2 are fairly good, R 2 is 0.60 which means that 0.60 of the variation in return on profit after tax model of Indian banks is attributable jointly by board of directors' size, board of directors' composition, board of directors' diligence, board executive directors, board promoters, leverage, size, while the rest of variation in r profit after tax of Indian banks can be explained by another variables which are not included in this study. It is clear from table7that TBS has a positive and significant impact on profit after tax of Indian banks. On the contrary, PEX and CR have a negative and significant impact on the profitability measured by profit after tax. Regarding return on net worth model, results in table7demonstrate the findings of model 3 that examines the impact of board of directors' characteristics on return on net worth of Indian banks.
Results of random effect model show that the R 2 and adjusted R 2 are fairly good, R 2 is 0.50 which means that 0 0.50 of the variation in return on net worth of Indian banks is attributable jointly by board of directors' size, board of directors' composition, board of directors' diligence, board executive directors, board promoters, leverage, size, while the rest of variation in return on net worth of Indian banks can be explained by other variables which are not included in this study. It is clear from table7that TBS, BD have a positive and significant impact on return on net worth of Indian banks. On the contrary, BC, PEX, size and CR have a negative and significant impact on the profitability measured by return on net worth.

Conclusion
The present paper seeks to examine the association between board characteristics and banks profitability. This present study relies on secondary data that are extracted from ProwessQ database. Financial data covers 10 years from 2010 to 2019. The study is based on convenience non probability sampling, in which 10 Indian banks were selected for conducting this research. The study uses four profitability measures: return on assets, return on capital employed, profit after tax and return on net worth, while board of directors' characteristics is measured by board of directors' size, board of directors' composition, board of directors' diligence, board executive directors and board promoters. The study is used leverage, size, and liquidity as controlling variables. Fixed and random effects models are used for analyzing the data.
. The findings revealed that TBS positively and significantly impacts ROA, ROCE, PAT and RONW, while PP negatively and insignificant impacts ROA, ROCE, PAT and RONW. The present study contributes to the existing literature by examining the impact of board characteristics which includes board promoters and executive directors on Indian banks profitability.