Urjit Patel, governor of the Reserve Bank of India, listens during a news conference in Mumbai, India, on Dec. 7, 2016. (Photographer: Dhiraj Singh/Bloomberg)

RBI Cracks The Whip On Private Banks

BloombergQuintOpinion

Set your house in order, or else. That’s the tough message the Reserve Bank of India has been sending out in recent months to private banks.

Last April, the RBI asked the board of Axis Bank to reconsider its decision to give a fourth term to its chief executive officer, Shikha Sharma. Sharma got the message and decided not to continue after December 2018. The board has since appointed a new CEO.

Earlier this month, the RBI refused to let Yes Bank founder and CEO, Rana Kapoor, stay on beyond end of January 2019. It had asked the board twice earlier to reconsider its decision to give another term to Kapoor.

The Yes Bank board did not get the message then – and it doesn’t seem to have got the message now.

The board has sought the RBI’s permission to let Kapoor stay on till April 2019 to facilitate finalisation of the annual accounts and, thereafter, until September 2019. It would be a surprise if the RBI acceded to this request.

At both Axis Bank and Yes Bank, poor compliance, especially reflected in understatement of non-performing assets, is said to be an important consideration underlying the RBI’s decision not to let the CEOs continue.

And now comes the direction to Bandhan Bank not to open any branches and to freeze the compensation of its CEO until it has complied with the requirement to lower the shareholding of the Non-Operative Financial Holding Company in the bank to 40 percent, as stipulated at the time of licensing the bank.

Presumably, this has to do with the requirement that promoter shareholding in a bank be brought down to 15 percent within 12 years of the setting up of a bank. Promoters have to provide a time table for reducing their shareholding down to 15 percent and adhere to it.

The RBI’s activism is especially welcome, given that its response to the problems at ICICI Bank was seen to be inadequate.

Recall that at ICICI Bank, the issue was the conflict of interest implied in Chanda Kochhar allegedly being party to a decision to grant a large loan to the Videocon group, when her husband had a history of financial dealings with the group. The board brushed aside the charges when they first surfaced but was eventually goaded into ordering an enquiry by Justice BN Srikrishna.

The RBI did not give any overt directions to ICICI Bank; we do not know if it gave any directions from behind the scenes. It was a show-cause notice issued by the Securities and Exchange Board of India in the matter of conflict of interest and a complaint from a whistle-blower that led to Kochhar being asked to proceed on leave until an enquiry had been carried out.

One case that will now be closely watched is Kotak Mahindra Bank, where the promoter has a shareholding of 30 percent even though it’s more than twelve years since the bank was given a license.

Under a relaxed dispensation given to the bank, promoter shareholding was to come down to 20 percent by Dec. 31, 2018. In August, Kotak Mahindra Bank issued perpetual non-convertible preference shares and claimed that in relation to total capital, it had met the requirement of dilution of promoter shareholding. The RBI rejected this contention. Rightly so.

The requirement of diversified ownership, which is central to RBI’s regulatory framework for private banks, is met when there is a dilution in voting rights and control. This has to do with the promoter’s share of equity capital, not with his share of total capital.

The developments at leading private banks this year have shown up the quality of governance at private banks. They have served to underline a well-understood fact of governance worldwide: the overwhelming majority of boards are ineffective.

If an important failure at public sector banks is that tenures of CEOs are too short, the opposite seems to be the problem at private banks: CEOs go on and on.
  • At Axis Bank, Shikha Sharma had been around for eight years in 2017—and was due to complete her term in 2018—when the board decided to offer her a fourth term. It was rumoured that Sharma had pressed the board for a decision in 2017 itself as she was weighing other offers.
  • At Yes Bank, Kapoor has been CEO for 15 years.
  • At ICICI Bank, Kochhar has been in the saddle for nine years.
  • At HDFC Bank, Aditya Puri has been at the helm for 23 years, with two more years to go, perhaps something of a world-record in banking.
It is high time that boards of banks are held to account for major failures.
Chanda Kochhar & Shikha Sharma at the FIBAC banking conference in Mumbai. (Photographer: Dhiraj Singh/Bloomberg) 

If there large divergences in assets year after year, if CEO misconduct is overlooked, if incentives are not aligned with performance, if there is a failure of succession planning, boards must be held accountable. The RBI must refuse to renew the term of a Chairman –or even interrupt his or her term. For other board members, RBI is approval is required at the time of appointment but not for renewal.

Maybe it’s time to go back to the old dispensation where renewal for board members too required RBI approval. Boards, and not just CEOs, must pay for governance failures.

TT Ram Mohan is a professor of finance and accounting at IIM Ahmedabad.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.