ICICI Bank FIR: Investigative Adventurism Or Covering All Bases?
The first information report filed in the ICICI Bank-Videocon Group loan case alleges a conflict of interest on part of ICICI Bank’s former Chief Executive Officer Chanda Kochhar, but it also casts a far wider net. The Central Bureau of Investigation, in its FIR, said that it may investigate members of various credit committees at ICICI Bank. The list includes the whose who of Indian banking, including veteran banker KV Kamath and current ICICI Bank CEO Sandeep Bakshi.
The FIR drew censure from Union Minister Arun Jaitley, who termed it as ‘investigative adventurism’. “ If we include the entire who’s who of the banking industry – with or without evidence – what cause are we serving or actually hurting,” Jaitley asked in a blog post on Friday.
Is the CBI being trigger-happy? Or is it simply covering all bases?
To try answer that question, it is important to understand the role that some of these senior bankers played in ICICI Bank between 2009-2011, when these loans were granted. It is equally important to understand how credit committees function and where the buck stops.
Role Of Credit Committees & Their Members
The CBI, in its FIR, said that the role of senior officers of the “sanctioning committee” may also be investigated. The officials mentioned, with the exception of Homi Khusrokhan, were all either on the committee of executive directors or on the credit committee.
- KV Kamath headed the ‘credit committee of the board’ through 2009-10 till 2011-12 in the role of non-executive director.
- NS Kannan and K Ramkumar were members of the committee of executive directors in 2009-10, 2010-11, 2011-12.
- Sandeep Bakshi was a member of the committee of executive directors in 2009-10, 2010-11 and 2011-12.
- Rajiv Sabharwal was a member of the committee of executive directors in 2010-11 and 2011-12.
- Sonjoy Chatterjee was a member of the committee of executive directors in 2008-09.
- Zarin Daruwalla was a senior executive in the bank’s corporate banking division.
- Homi Khusrokhan was a board member between 2009-10 and 2011-12.
BloombergQuint reached out to the executives named in the FIR through their representatives. They declined to speak concerning the case and their role on the credit committee of the bank during their respective tenures.
Both these committees are intended to play an important role in ensuring prudent credit decisions.
According to ICICI Bank’s annual report, terms of reference of the ‘Committee of Executive Directors’ is to approve or renew credit proposals as per rules approved by the board. The ‘Credit Committee’ of the board approves large value loan approvals but also keeps an eye on the overall portfolio quality of the bank. Since the latter has a majority independent members, it is intended to act as a gatekeeper of sorts on management decisions.
As such, even if there is no wrong doing, investigative agencies may be justified in asking questions.
Simply looking into their role does not mean anything, said senior lawyer HP Ranina. A FIR is a first step and questioning of the officials named does not mean guilt or innocence, Ranina told BloombergQuint.
Credit Committees: Theory vs Practice?
Senior bankers and sector experts that BloombergQuint spoke to said that credit committees rarely provide much of a counter-balance to management decisions. So while, on paper, the buck stops with these committees, in practice it stops with the top management of the bank.
Most of the time, except for the chairman and executive directors on the committee, other members do not understand credit, said a retired senior public sector banker. Further members on the committee keep getting shuffled, so it becomes a “management-show.” this banker said.
A senior lawyer, who deals closely with the financial sector, added that few, even at the board level, will oppose a proposal put forth by the senior management. Describing this as a ‘cultural problem, the lawyer said that if the chairman or senior management are comfortable with a proposal, other members of the committee will eventually go along with it.
Sunil Shrivastava, former deputy managing director at State Bank of India took a different view. According to him, there are enough checks and balances in place.
“Normally the people making the decisions are not connected with the credit and, at least in public sector banks, no single member of the committee can take a call. If there is any conflict of interest , the concerned member, usually an independent director in public sector banks, recuses himself,” said Shrivastava. He said it is only after a rigorous process and unanimous consensus that a loan sanctioned.
But even if, for instance ICICI’s credit committees, did not function as effectively as they should have, does the CBI have enough grounds to investigate?
Shantonu Sen, former joint director of the CBI said that officials cannot be questioned for sanctioning of a loan or even a loan turning into an NPA. It is the quid pro quo that becomes the offence, Sen said. So far, the CBI in its FIR has alleged quid pro quo only in the case of Chanda Kochhar. While saying that members of these crucial credit committees may be investigated, the CBI did not suggest any quid pro quo on the part of the other ICICI Bank officials.
Do Rules Need To Be Tightened?
While the CBI may or may not eventually find reason to expand its investigations in the ICICI-Videocon loan case, the episode may draw attention to the rules governing credit decisions.
At present, the RBI prescribes only a broad framework within which these committees functions. The final terms of reference for these committees are set by individual banks.
Most banks have up to three core Credit Approval Committees—taking decisions at the regional, zonal or circle level and a senior executive level—which are headed by the senior most bankers at that organisation level. These committees have loan-sanction limits set by the bank’s overall credit policy and depending on their size banks may choose to have several layers of committees.
Large public sector banks and foreign banks typically have over 5-6 layers of committees—from credit and risk analysis at each branch or regional level to board level committees—overlooking one loan proposal. Private banks on average have less fewer layers.
The lower the loan value you can automate the process based on scoring, but as the loan value becomes bigger you cannot reduce it to a formula. It is the individual [bank’s] bespoke decision, while there is general guidance from the RBI for credit appraisals and what considerations should be made before approvals.R Gandhi, Former Deputy Governor, Reserve Bank of India
The RBI can call on the minutes of these meetings if required but does not scrutinise them on a regular basis.
Is more active supervision of credit committee decisions needed?
No RBI supervisor is meant to do micro-management, said S.S. Mundra, former deputy governor at the Reserve Bank of India. “It is ridiculous to expect the RBI to look at every decision and supervise every branch. It is not possible to check all minutes. As with all audits it is conducted on a sample basis,” Mundra said.