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Disclosure Level of Indian Banks: International Comparison and Impact on Shareholder Wealth

Faculty Contributor: M. Jayadev, Associate Professor
Student Contributors: Ranjeet Singh Monga, Vishwanath Tiwari

Public disclosures are used as a mechanism to establish transparency in the system. Indian banks lag behind their foreign counterparts in terms of the extent of disclosure of financial information though the trend is towards more disclosure. The big question, however, is whether these disclosures are really appreciated by the shareholders. Purely in terms of impact on shareholder wealth, past disclosure norms announcements by RBI seem to have had little effect. But still, considering that the Indian banking industry is to be further liberalized to provide an open field to foreign banks, it makes sense for the Indian banks, both private and public, to increase disclosure in order to attract big MNC accounts and tap into foreign capital.

Regulators require banks to publicly disclose financial and other information which help shareholders, depositors, and other stakeholders to assess the level of risk and make investment decisions. Banks are thus subject to market discipline and the regulator can also use market pricing information as an indicator of the banks' financial health. Market discipline refers to a market-based incentive scheme in which investors in bank liabilities, such as subordinated debt or uninsured deposits, "punish" banks for greater risk-taking by demanding higher yields on those liabilities. This article tracks the disclosures made by the banks across the globe to find out where India stands in terms of disclosures in the banking industry and also seeks to find out how the disclosures, as and when mandated in India, have impacted the share prices of various banks.

Initiatives Towards Market Discipline

Financial engineering and technological improvements have caused financial intermediaries to be involved in overly complex and advanced financial operations. These activities have become increasingly expensive to monitor and supervise from the perspective of regulatory agencies. A number of recent policy initiatives recognize the importance of market discipline in safeguarding financial stability1. These include:

  • Initiatives to create internationally accepted accounting standards (IAS) and proposals to make it mandatory for banks to issue subordinated debt.
  • Pillar 3 of the proposed revised capital framework of Basel II accord2 encourages greater bank disclosure to strengthen market discipline. In particular, the hope is that greater disclosure of a bank's risk profile will provide them with incentives to hold capital commensurate with the risks they take.

We will now analyze the results of a comparative study of disclosures made by banks worldwide.

Comparative Study of Disclosures Made by Banks across the Globe

Annual reports of nine banks from various parts of the world were studied and the information contained therein was used as proxy for the information disclosure regulatory requirements the banks have to follow their respective countries. The banks chosen as samples for the study purpose were ANZ Bank (Australia), ASB Bank (New Zealand), Emirates NBD Public Joint Stock Company (Dubai), Bank of China (China), Banco do Brasil (Brazil), Citibank (USA), The Mauritius Commercial Bank Limited (Mauritius), VTB Bank (Russia), and Corporation Bank (India). Exhibit 13 shows a comparative chart with the disclosure details required in six countries on the basis of information contained in the annual reports.


Full details of Tier 1 and Tier 2 capital N N N N N Y
Details of loan capital issued in various countries N Y Y N Y N


Maximum exposure to credit risk N N Y N Y N
Concentration of credit risk by Geography and Industry N Y Y N Y Y
Ratings of the customers (%) to whom credit is imparted N N N N N Y
Single borrower/ Group Limits Exceeded Y N Y N Y N
Exposure to Country Risk Y N N N N Y
Traded Market Risks using VAR (Average, High & Low) N Y Y N Y N
Foreign Exchange Risk N N Y N Y N
Equity Price Risk N N Y N N N
Liquidity Risk N N Y N Y N


Details of investments in trading securities available for sale assets and derivative instruments (country wise) N Y Y N Y Y
Effect of 1% shock on next year's net interest income N Y Y N Y Y

Assets and Liabilities

Average Balance Sheet and Average rate of interest on time & demand deposits N Y N N Y N
Fair value of financial assets and liabilities N Y Y N Y Y
Interest sensitivity of assets & liabilities N N N N N N
Maturity Analysis of groups assets and liabilities N N Y N Y Y

Income and Expenditure

Income on investment shown separately for 'Assets held for sale' & 'Trading Securities' N Y Y N Y N
Commission , Brokerage and Exchange shown separately N Y Y N Y Y
Total capital and current expenditures committed N Y Y N Y Y

Provisions and NPAs

Details of Interest foregone on Impaired Loans N Y N N N Y
NPAs industry wise, customer type wise N N N N Y N
Total write offs and recoveries by industry N Y N N N N
Details of bad loans in each sector like agri, industry etc. N N Y N Y N
Collaterals repossessed N N N N Y Y
Loans restructured, sold to ARCs Y N N N N N

Business Highlights

Credit Cost N N N N Y N
Excess Reserve Ratio N N N N Y N
Employee classification by sex, age, education, and gender N N N Y Y N
Coverage Ratio (Service fees/Personal Expenses) N N N Y N N

Shareholder Information

Top twenty shareholders (both for equity and preference) N Y N N Y N
Distribution of shareholding N Y N Y N N

General Information

Superannuation and other post employment benefit schemes N N Y N N Y
Market Share N N N Y N N
No. of customers and no. of credit and debit cards N N N Y N N
Exhibit 1. Public disclosures by banks in various countries
Indian banks are lagging behind their counterparts in other developing countries such as China, Russia, and Brazil on various disclosure fronts such as assets and liabilities, investments, and NPAs.

As can be seen from the chart, in terms of disclosures, Indian banks are lagging behind their counterparts in other developing countries on various fronts such as assets and liabilities related disclosures, investments and NPA (non-performing asset) related disclosures, etc. Banks in China, Russia, and Brazil are subject to much more stringent disclosure norms. This difference can lead to significant challenges for the Indian banks in near future, as described next.

Probable Impact of Less Disclosure by Indian Banks

The banking sector in India is slated to open its door to foreign players in the year 2009 to the full extent as the restrictions on the number of branches that a foreign bank can open (currently 24 per year) will no longer exist. With increased presence of foreign players in this sector the competition is going to be intense. These banks will bring with them the best practices from across the globe to gain a competitive edge over Indian banks. Citibank, Standard Chartered Bank and HSBC Bank have already captured a significant chunk of business in a short span of time despite the limitation on the number of branches which they can open. If Indian banks have to compete with these banks they need to be in a much stronger position than they are presently for the following reasons.

  • Business across borders is increasing at a fast pace and the multinational companies coming to operate in India will like to engage with the banks which have a high degree of corporate governance and are financially sound. Disclosure norms can play a crucial role in building an image in the mind of these companies.
  • Though the current Indian shareholders don't care much about the disclosures made by the banks as is proved in the second part of the article, the situation is not going to remain the same with shareholders becoming increasingly informed about their rights.
  • Also, if the Indian banks need to access the foreign markets to raise capital at a much cheaper rate they have to give a serious thought to disclosure norms. The investors in the developed markets are much more informed and demanding than their Indian counterparts and view corporate governance practices as a starting point before putting their monies anywhere.

Though it is quite clear that Indian banks' disclosure is very low when compared to banks in most other countries, a question remaining to be answered is whether the shareholders of these banks actually worry about the lack of disclosure and how they react to new norms which the Reserve Bank of India (RBI) has come up with periodically.

Impact of Disclosure Norms Announcement on Stock Prices

Comparison of disclosures by various banks shown above (Exhibit 1) clearly shows that Indian banks are lagging behind significantly when it comes to disclosures in the areas of capital, risk and investment. Further, the study attempted to find out the impact of RBI policy announcements (RBI directives4 to ensure transparency and efficiency in the banking system) regarding risk disclosure norms on shareholder wealth in the Indian banking industry using the Event Study method. This study covered the risk disclosure policy announcements by RBI over the past eight years. Bankex5 which is an exclusively designed index by BSE, takes 12 major stocks from the banking industry as proxy for performance of the Indian banking industry as a whole. Bankex has been used to find out the behavior of abnormal return due to disclosure policy announcements. Attempt has also been made to find out the difference between the pattern of abnormal returns of private and public sector banks; out of the four banks in the study two banks are public sector banks (SBI, Bank of Baroda) and other two are from the private sector (HDFC, Axis Bank).

The Event Study method that was performed has been briefly outlined below along with the results and possible interpretations.

Event Study Method

Event study is an important research tool used to measure the effect of an economic event on the value of a firm. Impact of any event can easily be found out by performing T-test for significance where T-stat is calculated using the value of abnormal return and standard error.

Hypothesis Formulation

In order to perform T-test for significance, null and alternate hypothesis were formulated as follows:

  • H0: Announcements of risk disclosure norms by RBI does not have a significant impact on shareholder's wealth in Indian banking industry.
  • H1: Announcement of risk disclosure norms by RBI does have a significant impact on shareholder's wealth in Indian banking industry.

Basic Assumptions and Limitations of the Study

  • For the purpose of the study, event was defined as risk disclosure announcements made by the Reserve Bank of India.
  • The time period of the events examined was from Jan 2000 - April 2007.
  • CNX-50 or Nifty was assumed as the proxy for market return.
  • Daily returns were computed based on the differences between the prices/index values between consecutive trading days.
  • Other events were assumed to have no impact on stock prices.


To begin with, significant events were identified from the Trend and Progress Report of RBI. Daily share price and Index data were collected from Prowess (Jan 2000- April 2007). Announcement date was reckoned as "event day zero" (t=0) and a window period of nine days (four days before t=0 and four days after t=0) was selected for calculating abnormal return. Normal return was calculated for individual scrip based on its historical linear regression relationship with market returns (Ri=&Alpha + &Beta*Rm) where &Alpha and &Beta are respectively the intercept and slope of linear regression line. Here the regression was performed on past 150 days of stock/index data. Abnormal return was calculated as the difference between actual and expected daily return. Standard error was calculated by taking the variance of past 150 days index value. T-stat (a mathematical parameter to perform a test of significance) was calculated by dividing the daily abnormal return by square root of standard error6.

Results Analysis

Analysis has been done separately for each event date. Significance of the impact of disclosure norm has been judged by the value of T-stat. T-stat value greater than 1.65 denoting a 90% confidence level has been highlighted in the table to get an idea of intensity of impact of event on market. The example below analyzes the impact of the event that occurred on 10th Oct, 2000.

Example - Announcement Date: 10-Oct-2000

Disclosure Norm Announced by RBI: In order to bring more transparency to the balance sheets of public sector banks and as a further step towards consolidated supervision and to provide additional disclosure, it was decided that public sector banks should annex the balance sheet, profit and loss account, report of the Board of Directors and the Report of the Auditors in respect of each of their subsidiaries to their consolidated balance sheet beginning from the year ending March31, 2001. This was a major policy development in the Report of Trend and Progress of India 200-2001. Exhibit 2 shows the change the changes in Bankex and individual banks' return and the corresponding T-Stat values over the period.


Exhibit 2. Abnormal Return and T-Stat for different banks during window period of nine days

Interpretation of Result

There is no overall significant impact on shareholder wealth except in the case of Axis Bank which shows the abnormal return of around 8% with T-stat =2.5 which is significant with almost 99% level on day 4 after policy announcement. Hence we fail to reject the null hypothesis with respect to the specific event. So above mentioned risk disclosure norm didn't have a significant impact on shareholder wealth in Indian banking industry.

The same kind of analysis was done for all other event dates and it became quite evident that risk disclosure norms don't affect the value of shareholders fund. Although in a few cases it was observed that banking industry as a whole or some individual players showed abnormal returns at different points of time (either before or after the event date within the window period), the overall the impact was not significant at all. Also there is no significant difference in the reaction of private and public sector banks to disclosure norms.

The nature of ownership in Indian banking industry is one of the reasons which hinder the impact of disclosure norms on shareholder wealth.

The nature of ownership in Indian banking industry is one of the reasons which hinder the impact of disclosure norms on shareholder wealth. The government has a majority ownership in the banking sector. Comparison of share price volatility of banking companies with corporate houses in India shows that banking industry is less volatile in nature. Also investments made by retail shareholders in banks are generally long-term. This is verified by the fact that banking scrips are of low traded volume when compared to that of other companies, clearly pointing out that retail investors don't buy shares of banking companies for trading purposes.


Indian banks are far behind their foreign counterparts in disclosing information to the public. There is lot of talk about corporate governance in the banking industry which requires banks to be more transparent in their operations and make disclosures which can help investors in making informed decisions. However the study shows that new disclosures mandated by RBI do not really have any significant impact on the share prices of these banks. Still, in the wake of increased competition from foreign banks, disclosure norms can serve to be important differentiating factor to attract and retain big corporate clients.


Jayadev M. is an Associate Professor in the Finance & Control Area at IIM Bangalore. He can be reached at

Ranjeet Singh Monga (PGP 2007-09) holds B.Com and LLB degrees from Vikram University, Ujjain and is a Qualified Company Secretary. He can be reached at

Vishwanath Tiwari (PGP 2007-09) holds a B.E. degree in Mechanical Engineering from Delhi College of Engineering (University of Delhi), Delhi. He can be reached at


Finance, Banking, Disclosure Norms, Basel II, Event Study, Shareholder Wealth, India


  1. Erlend Nier and Ursel Baumann, 2003, 'Introduction' in Market Discipline, Disclosure and Moral hazard in Banking, April 2003, Last accessed on July 15, 2009.
  2. Basel II is a banking supervision accord. It describes and recommends the necessary minimum capital requirements necessary to keep the bank safe and sound. It consists of three pillars to achieve this objective: (1) Minimum (risk weighted) capital requirements (2) Supervisory review process (3) Disclosure requirements.
  3. The balance sheets of these banks were downloaded from their respective websites.
  4. Major Policy Developments given in Report on Trend and Progress of Banking in India published annually by RBI.
  5. Indices, BSE Bankex, Last accessed on July 15, 2009.
  6. M. Jayadev and Rudra Sensarma, Mergers in Indian Banking: An Analysis, Last accessed on July 15, 2009.
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