RBI’s ‘Trust Us, We Know Best’ Approach Needs A ChangeBloombergQuintOpinion
The Reserve Bank of India behaves a little bit like an Indian parent when it comes to private sector banks. “Trust us. We know what’s best for you” – seems to be the general approach. They can’t do the same with public sector banks as their real parent — the government — is not someone the RBI will take on often.
And so, much of the tough love is directed at the private banks in general and, more recently, private bank chief executives in particular.
On Friday, RBL Bank Ltd. informed exchanges that the RBI had approved the reappointment of long-time CEO Vishwavir Ahuja only for another one year. The board approved a three-year reappointment, which would have been within the new tenure limit of 15 years for private bank chiefs. Ahuja has been CEO since 2010.
In July last year, Federal Bank’s Shyam Srinivasan fell to the same fate. His reappointment for three years, approved by the board, was cut short to one year from September 2020. He, too, was within the 15-year limit having been first appointed CEO in 2010. In 2019, too, Srinivasan was given a one-year extension.
In contrast, on Tuesday, Bandhan Bank Ltd.’s Chandrasekhar Ghosh was granted a three-year extension. Ghosh has been the CEO of Bandhan since inception but the only difference is that the organisation became a bank in 2015, prior to which it was a micro-finance institution.
Uday Kotak, who is above the 12-year limit set for promoter CEOs, is being allowed to complete his tenure till 2024. That three-year tenure extension, incidentally, came within the time period that the RBI first proposed caps on bank CEO tenures and finally implemented it. But for that extension, Kotak would have had to exit sooner because he has been CEO since 2003.
In years prior, Yes Bank Ltd.’s Rana Kapoor and Axis Bank Ltd.’s Shikha Sharma had failed to get RBI approvals for an extension of their tenure. While one bank collapsed, the other moved on to try and clean its books.
Feeling For Clues In The Dark
Why did Srinivasan and Ahuja not make the cut? Why did Ghosh and Kotak manage to get approvals for their extensions? These are obvious questions to ask.
You won’t find the answers in publicly disclosed data.
RBL Bank, while having seen considerable volatility in stressed assets over the last two-three years, has reported gross bad loans of 4.3%. Capital adequacy is at 17.5%, with the bank having raised capital Rs 1,566 crore in November 2020 from a clutch of investors including Baring Private Equity.
Federal Bank has a gross NPA ratio of 3.4% and a capital adequacy of 14.6%.
Kotak Mahindra Bank has a gross NPA ratio of 3.25% and a capital adequacy ratio of 22.3%.
Bandhan Bank has a gross NPA ratio of 6.8% with some concerns about whether top-up loans have been used to keep stress in check. Its capital adequacy ratio is 23.5%.
Can anyone, looking at publicly available financials, tell why CEOs of two of these banks were booted out while the other two weren’t. You can’t.
What Does The RBI Know?
So you start asking, what does the RBI know that is not in public domain. The answer to that is always “a lot” combined with “you will never know”.
The RBI typically, as part of its annual review of banks, evaluates CEOs. There is a matrix of sorts where CEOs are given scores based on a number of criteria, ranging from compliance to financial performance of the bank. Forget the scores, even the criteria on that matrix and the relative weightages assigned to them are not in public domain.
The bank inspection reports, which cover non-financial aspects such as compliance, culture, technology among others are also not made public. This, despite a long legal battle after which even the Supreme Court had asked the regulator to make these reports available through RTI. Still, most who have tried will tell you that the regulator does all it can to delay, defer the release of bank inspection reports.
So, when you, as an investor or even a depositor, hear that the RBI has denied an extension to a bank CEO, you ask many questions in your head.
Is the bank safe? What is hidden beneath the surface? Should we withdraw our money? Or sell our shares?
You are left guessing.
It is also completely futile to extend a bank CEO’s tenure by one year. That one year becomes a period in which the bank remains under a cloud of uncertainty. At its worst it leads to a deterioration at the bank. At its best, it prevents any decisions from the outgoing CEO to improve or change things at the lender.
Taking The Middle Path
At this point, many will say that it is naïve to expect that the regulator will open up completely about sensitive matters related to deposit-taking institutions. It may even be dangerous to do so.
True. But it is difficult to understand this level of opacity.
Is there a way to find a middle path? For instance, can there be public stated criteria on which top bank managements are judged. We already have a 12-15 year maximum tenure in place. Within that tenure, perhaps the RBI should lay down criteria on which CEOs will be judged?
Alternatively, is there a way for the central bank to ascribe some rationale to a decision to cut short a CEO's tenure? The RBI is great at saying very little while saying a lot. Take the example of fines imposed on banks. The release that accompanies theses fines says little but gives you a gist of the areas of regulation where the bank had erred.
Equally, perhaps the RBI can advise the boards to send names of three potential candidates even at the time of reappointment of CEOs. Then, should the regulator not be in a mood to give the incumbent CEO an extension, it could immediately approve another candidate? At the least the bank will be saved a year in limbo.
These solutions may not be anywhere close to optimal. But neither is the regulator’s current “trust us, we know best” approach. It leaves too much to the imagination.
Ira Dugal is Executive Editor at BloombergQuint.