Note To Bank Boards: Protect The Banks, Not The BankersBloombergQuintOpinion
There are two parallel stories playing out across private banks in India. One, a story in which the propriety of a leader is being questioned. The second, a story in which questions were raised about the competence of a leader.
In both these stories, while initial concerns stemmed from the top management, the conduct of the respective boards also left a lot to be desired.
Consider the case of Chanda Kochhar and ICICI Bank.
The allegations of a conflict of interest in loans granted by the bank to the Videocon Group first emerged in 2016. They resurfaced on social media last month. On March 28, the bank released a statement, which said that the board has looked into the matter and come to the conclusion that there was “no question of quid pro quo / nepotism / conflict of interest” in the sanction of loans. A day later, the Indian Express published an investigation detailing transactions between the Videocon Group and NuPower Renewable, promoted by Chanda Kochhar’s husband Deepak Kochhar. The report alleged quid pro quo in loans given by ICICI Bank to the Videocon Group and stated that investigative agencies are looking into the matter.
Did the ICICI board release the statement, a day before the Indian Express report was published, to support Chanda Kochhar? Or did it do so to protect the bank? And should it be assumed that what is best for the management is best for the bank?
Before the March 28 statement, the bank or its board had given no indication that it was looking into the matter. If the board was investigating allegations of impropriety at the highest levels, should that information not have been disclosed? Should it also have erred on the side of caution and commissioned an external inquiry? Doing so may have meant some embarrassment for Kochhar but would have served the bank better.
On the flip side, if the board was fully convinced that there was no question of impropriety, then should it not, willingly, face all questions? Instead chairman MK Sharma addressed a hurriedly called press conference where no questions were taken. It would have also done well to convince its chief executive, in this case Chanda Kochhar, to help put all speculation to rest or step down for the period of the inquiry.
It did none of this. In the process it failed its shareholders but, more importantly, its depositors. While there is no question that depositor money is safe and sound, the longer uncertainty persists, the more damaging it is for the bank. On Monday, rating agency Fitch Ratings said the incident has created reputational risks for the bank.
The investigation could also undermine investor confidence in the bank, with potential implications for funding costs and liquidity in an extreme scenario, although its status as a systemically important bank implies it will benefit from some form of state support. Meanwhile, there is a potential risk of financial penalties, as well as legal action, if the investigation comes up with findings against the bank.Fitch Ratings on ICICI Bank
Issues related to the conduct of the Axis Bank board are different but also similar. There, too, it appears the board was more concerned about the banker than the bank. In the middle of last year, a number of reports had emerged about the exit of Axis Bank CEO Shikha Sharma. Sharma’s term was due to end only in mid-2018.
On July 14, Bloomberg News reported that executive search firm Egon Zehnder had been appointed to start the search for a chief executive. The search may not lead to a change in management, the bank clarified. Fair enough. In less than 15 days, the board said it had decided to reappoint Shikha Sharma as the chief executive officer.
Eight months later, Sharma and the board have decided that the current CEO will exit by December. The decision was prompted by a delay in RBI approval for Sharma’s reappointment. On April 1, the Economic Times reported that the RBI had sent queries to the board on its decision to reappoint Sharma.
Once again, the board, this time of Axis Bank, may have acted hastily last July when it rushed to reappoint Sharma. Sharma’s tenure had seen both credit risk and operational risk concerns emerge. Bad loans have risen during her tenure and the bank has reported two consecutive years of divergence in bad loan reporting. More recently, the bank saw its bullion import licence revoked, due to allegations of money laundering via bullion trader accounts held by the bank.
Did the board take all aspects of her performance into account before the reappointment? Did it scan the market thoroughly enough to be convinced that no one can do a better job of leading the bank?
To be sure, Axis Bank has not been alone in seeing bad loans rise or in reporting a divergence in bad loan reporting. Perhaps the board took this broader environment into account in reappointing Sharma.
Also Read: Axis Bank’s Board Deserves A Thank You
Board Governance In Private Banks
While board governance concerns have often been raised in the context of public sector banks, private sector banks are not immune to shortcomings due to structural issues either.
Unrelated to the current issues, the PJ Nayak committee of 2014 had cautioned that governance concerns in private banks emerge from two key areas.
One of these is the lack of large shareholders due to RBI restrictions on bank shareholding. “When individual shareholdings are small, investors also tend to be more disengaged. Allowing larger block shareholders generally enhances governance,” the committee had noted while recommending a category of ‘Authorised Bank Investors’, who are permitted larger shareholdings in banks.
More importantly, it had said that private bank boards need to be more vigilant about the quality of the loan asset portfolios. “In private sector banks senior management is incentivised on the basis of bank profitability, and the compensation paid out - through stock options - is in substantial measure contingent on the stock price of the bank. There is a potential incentive to evergreen assets in order that provisions do not make a dent in profitability,” the committee had said.
Perhaps its time some of these structural issues be considered to strengthen governance across the sector - public and private.