The Indian banking sector is no stranger to controversy. In particular, the growth of non-performing assets has prompted the Reserve Bank of India (“RBI”) to intensify its regulatory scrutiny in a push for greater transparency. While the spotlight had previously focused on public sector banks’ governance lapses, poor financial performance, and significant infusions of government capital, this year private institutions have been generating negative headlines of their own.
The issues prompting RBI intervention are likely familiar to observers of the Indian market: Yes Bank and Axis Bank each got into hot water after misclassifying loans that should have been counted as non-performing, and ICICI Bank’s CEO faced whistleblower claims of nepotism and conflicts of interest. Yet the RBI’s interventionist response to these issues has raised eyebrows. The RBI not only issued a hefty INR 60 million fine to Yes Bank, but it also trimmed CEO Rana Kapoor’s term of service from three years to just one, ending January 2019. Axis faced a similar fate: the bank received an INR 30 million penalty from the RBI following the discovery of non-compliance with the Income Recognition and Asset Classification norms, and the termination of CEO Shikha Sharma’s term, which will end this December.
Over at ICICI, allegations of nepotism were raised back in March against CEO Chanda Kochhar, who was a member of the credit committee that allegedly extended a INR 3.25 billion loan to Videocon Group—which in turn enabled a loan of INR 640 million to be paid to an entity linked to Kochhar’s husband. The board initially responded by expressing support, only later putting Kochhar on leave while an independent investigation took place. Here, the RBI was more quiet: while the regulator issued a significant fine on the bank as punishment for unrelated treasury violations just as the whistleblower claims went public, for months it refused to comment on the governance allegations against the CEO. However, after Kochhar ultimately resigned in October, the RBI imposed itself on the succession process, rejecting the company’s request for a five-year term for new CEO Sandeep Bakhshi in favour of a three-year term.
In the past, the regulator’s impact has been somewhat narrow in scope. Hefty fines may have incentivised short-term improvements in financial reporting, but companies repeatedly used accounting loopholes to paper over their true performance. With an interventionist approach that includes removing and restricting long-serving, celebrated executives, the RBI’s strategy appears to have evolved. The regulator looks increasingly willing to proactively address corporate governance issues and discourage bad behaviour in order to yield a more cautious, transparent and stable banking system.
Adeline is an analyst covering the Indian market.