Private banks raise governance concerns

Controversies at two of India’s top three private banks have raised concerns, not merely about fraud and bad loan, but about the role of the board of independent directors, who are legally responsible for keeping listed companies on the straight and narrow path. Unfortunately, like with every corporate controversy, from the Tatas to Infosys or the failed Satyam Computers, the actions of the board have raised eyebrows all over again.

Lets look at what is going on at Axis Bank and ICICI bank and the deleterious impact that it has on public sentiment about the safety of banks and their own deposits. The Axis bank controversy snowballed after it became clear that Reserve Bank of India (RBI) had refused a fourth term to Shikha Sharma, its high profiled CEO. This was after the Axis Bank board had been especially benevolent to Ms Sharma. It had not only cleared her reappointment for another term starting 1st July 2018, despite many negatives, which I will come to later, but also given her the same bonus and stock options as last year, ignoring the fact that they ought to be linked to performance, which in this case was rather poor in recent times.

The RBI’s decision not to extend Sharma’s term would not have happened without some discussion with the board. And yet, the board has still attempted a face-saver. A statement released by the bank said that the “board of directors have accepted a request from Chief Executive Officer Shikha Sharma to shorten her reappointment period till the end of December 2018”.

This is embarrassingly disingenuous. Can a CEO, who has been told by the banking regulator that her term will not be extended, go ahead and propose a shorter new term for herself? One presumes that the board spoke to the RBI and requested to appoint a new CEO and got some kind of informal okay. If the RBI has agreed to this request, it only exposes itself as a weak regulator and if it rejects the proposal to give Ms Sharma another seven months as CEO until December 2018, then it is further embarrassment to the board.

Remember, the argument that a bank cannot function without a CEO after the end of June 2018 holds no water at all. Shikha Sharma’s predecessor was Dr P J Nayak, who had a far bigger reputation and was significantly more indispensable to Axis Bank that Ms Sharma would ever be. And yet, in another shameful decision, the bank’s board had ganged up against Dr Nayak’s recommendation of an internal candidate and chose Sharma to head the bank. Humiliated, Dr Nayak who had transformed a stodgy public-sector bank (called UTI Bank) to a smart private bank since 2000, resigned and walked out overnight. If Axis Bank survived Dr Nayak’s departure by putting in place board-supervised management committee, there is no reason why it could not be done again.

It is important to remember that RBI’s refusal to extend Ms Sharma’s term is with several good reasons. The bank’s non-performing assets increased from Rs 4,110 crore at the end of March 2015 to a whopping Rs 21,280 crore at end of 2017 — a five-fold jump in bad loans over two years, while net profit halved during that time. Worse, the RBI had pulled up the bank for under-reporting bad loans and forced it to revise its disclosure and classification, and slapped a Rs 3 crore penalty on the bank in March this year.

It soon suffered the ignominy of being the only bank whose gold import license was cancelled. Banking source say this was because of dubious conversion and remittances made by bank officials during the demonetisation period. This had led to the arrest of several officers of the bank. There was another controversy about the bank’s results having been leaked on social media ahead of their announcement. And yet, the board of directors not only cleared the same stock options, bonus and remuneration but also another term as CEO. In fact, the RBI has suspended bonus payments to the CEOs of all three private banks — Axis, ICICI and HDFC.

The situation is no different at ICICI Bank. The board of directors rushed to publicly back CEO Chanda Kochhar with regard to allegations about conflict of interest with her husband’s dealings with the bank’s large borrowers — especially those who have turned large defaulters. The board had emphatically denied any wrongdoing on her part. Now that the government investigation agencies have escalated matters and issued a look-out notice against her husband Deepak Kochhar and brother-in-law Rajesh Kochhar, the board’s actions look hasty and lacking independence. It needed a global rating agency (Fitch) to remind the bank that the controversy “raises questions over the lender’s governance and creates reputational risks”, which are beginning to impact the bank and its shareholders.

Interestingly, the governance concerns at private banks have come at a time when the government’s economic advisors have been touting privatisation as a panacea for the problems of bank fraud and massive problem of bad loans that have called into question the viability of some nationalised banks. The lesson here is simple. There is no substitute for better accountability of the top management whether the company is government owned or private.

Sucheta Dalal is the managing editor of Moneylife Magazine and a Founder Trustee of Moneylife Foundation. She was awarded a Padma Shri in 2006 for investigative journalism.

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