THE NPA TANGLE
Although the NPAs of private sector banks are far lower than those of their counterparts in the public sector, the recent surge in their bad loans has come under intense scrutiny
showed that Axis Bank hadn’t disclosed bad loans worth about Rs 5,600 crore. HDFC Bank, too, reported a divergence. ICICI Bank maintained it isn’t required to make the disclosure. Among private sector lenders, ICICI Bank had the highest NPAs on its books (Rs 44,237 crore at the end of September 2017), followed by Axis Bank, HDFC Bank and Jammu and Kashmir Bank.
The ICICI Bank-Videocon imbroglio has underscored the importance of corporate governance and the role of independent directors. Could independent directors have flagged the issue before it became a full-blown crisis? Life Insurance Corporation of India (LIC) is the biggest shareholder in ICICI Bank (12.3 per cent) and its chairman V.K. Sharma is on the bank’s board. Other non-executive directors are Tushaar Shah, Dileep Choksi, Amit Agarwal, Uday Chitale (independent director) and Neelam Dhawan (additional and independent director). Experts find it astounding that none of the directors raised corporate governance issues in the bank over the past two years. When a board turns a blind eye to corporate governance slippages, it is tantamount to being complicit in the matter, say experts. “There was no need for the board to give a certificate to Chanda Kochhar at the very start. Now, they are stuck,” says an industry veteran, who is an independent director on several boards, on condition of anonymity. “They could have done an independent inquiry before giving Kochhar the clean chit.” A board committee could have been set up to investigate and officials under the scanner summoned.
According to Shailesh Haribhakti, managing partner and CEO at Haribhakti Group, an accountancy and advisory firm, above everything else, a personal ethic should drive individuals in positions of power. “Executives should develop a culture of intolerance towards anything that smacks of a lack of integrity,” says Haribhakti, adding that an investigation should be called if there’s even a shadow of doubt and conducted “as objectively as possible”. In the ICICI Bank case, despite intense public scrutiny and investigations by multiple agencies, the bank’s board is yet to order an independent probe and,
has rushed to back its CEO, refuting allegations of nepotism in the bank. Global ratings agency Fitch has said the ongoing crisis at ICICI Bank raises questions of corporate governance and puts the bank’s reputation at risk. “The presence of the bank’s CEO on the credit committee and the bank’s reluctance to support an independent probe have, in our opinion, created doubts over the strength of its corporate governance practices,” the agency said on April 10.
And this isn’t the first such case. The role of independent directors had come under question in the 2009 Satyam case, in which promoter Ramalinga Raju admitted forging accounts to exaggerate profits. Last year, a tussle between the company’s board and its founders threw up critical corporate governance issues at Infosys. A Sebi-appointed committee on corporate governance, under Kotak Mahindra Bank chairman Uday Kotak, has proposed sweeping changes in the appointment of independent directors in listed entities. While the Companies Act stipulates the need for at least three directors, the new recommendation is for a minimum of six. It was also proposed that directors attend at least half the meetings held by the board and the age limit of non-executive directors be capped at 75. Also, a director should not be on more than eight boards, the panel recommended.
Haribhakti says it would be unfair to regard all private banks with suspicion on the basis of a few bad cases; many banks, both private and public, have set high corporate governance standards, he maintains. “Our country has pivoted itself out of the era of crony capitalism,” says Haribhakti. “Independent directors have to show the highest levels of integrity. Expectations from them are heightened when there are allegations of impropriety.”
CONFLICT OF INTEREST
At the heart of the ICICI Bank crisis is a letter that Arvind Gupta, a shareholder in both the bank and Videocon, wrote to the prime minister (with a copy marked to the RBI) in 2016, alleging quid pro quo. Gupta claimed that Deepak Kochhar, who had roped in Dhoot as an investor in his energy start-up NuPower Renewinstead, ables, benefited from his relation with Chanda. Multiple layers of transactions at NuPower, including a Rs 64 crore loan from Dhoot, the creation of different entities and the final transfer of all shares owned by Dhoot to Deepak Kochhar six months after the Videocon group got a loan of Rs 3,250 crore from ICICI Bank, are under the scanner of investigating agencies. Also under investigation are the business dealings of Rajiv Kochhar, whose firm Avista Advisory Group advised clients of ICICI Bank, in what is seen as a clear case of conflict of interest.
“They should have ensured that the business interests of relatives are very distant from the business interests of the bank,” says Arun Maira, management consultant and former member of the Planning Commission. For the record, though, Deepak Kochhar has claimed that his wife was unaware of his business links with Videocon. In the case of Rajiv Kochhar, the bank’s defence has been that a brother-in-law of the CEO does not fall under the definition of ‘relative’ under the Companies Act and, therefore, it is not mandatory for the bank to disclose his business interests. However, isn’t it but natural for the public as well as the investors and shareholders of a reputed bank to expect the highest level of probity and transparency from its top executive? “When it comes to business matters, the higher you climb the ladder, the further you should keep away from those directly related to you,” says Maira. “It should be self-imposed and not regulated.”
Meera Sanyal, former CEO and chairman of the Royal Bank of Scotland in India, cautions against jumping to conclusions before the investigation agencies present their findings. “Conflicts of interest such as those alleged in the ICICI Bank case are extremely serious. One can only hope Chanda had disclosed these associations, which is what is expected from any CEO or senior manager, as per good governance standards.”
Dhoot denies any foul play in his dealings with Deepak Kochhar. “I have not invested any money in NuPower,” he told india today in a telecon. Dhoot
said the company was founded for Rs 1 lakh when he and Kochhar decided to go together, and he had no further financial transactions with the firm. In a statement to the bourses, ICICI Bank has said it has “full confidence and reposes full faith” in Chanda Kochhar and there is no question of “quid pro quo/ nepotism/ conflict of interest as is being alleged in various rumours”. The bank told the exchanges on April 9 that its board will meet next on May 7 to consider the company’s audited results for 2017-18.
WAS THE RBI NEGLIGENT?
These cases have also put the spotlight on the RBI’s oversight of corporate governance failures in private banks. In the case of ICICI Bank, experts have questioned the RBI’s silence despite whistleblower Gupta shooting off his letter two years ago. “The least the RBI could have done is ask ICICI Bank to set up a board committee to independently investigate the allegations,” says an expert. The RBI has sweeping powers to regulate private sector banks. In a lecture at the Gujarat National Law University in March, RBI governor Urjit Patel said, “Appropriate rules on fitness and propriety, and banks’ internal governance structures are in place with respect to private and foreign banks... They (private bank CEOs) could be readily cautioned through their boards and even replaced by the RBI in case of large or persistent irregularities.”
This is the power the RBI exercised in the case of Shikha Sharma, nudging Axis Bank to shorten her term. Private bank chiefs are appointed for three years by the bank boards, and each time, it has to be cleared by the RBI. Experts say the RBI can replace them in the middle of their terms. Urjit Patel had remarked in his Gujarat university lecture that a private bank that fails to meet bank solvency standards and is put under the RBI’s Prompt Corrective Action (PCA) framework would find it hard to raise capital, and would need to put its house in order so that it can raise money from the markets and get back on the growth path.
In contrast, the RBI cannot exercise the same rights with public sector banks. Although all commercial banks in India are regulated by the RBI, under the Banking Regulation Act of 1949, the central bank cannot remove directors and the management in public sector banks. “The NPA crisis and frauds in the Indian banking sector are evidence of something gravely wrong with governance in Indian banking,” says Sanyal. “The pressures of crony capitalism and political interference have compromised the integrity of Indian banks and bankers. A radical overhaul is needed.” The RBI has a major role to play in restoring credibility in the Indian banking system, she adds.
It’s one thing for ICICI Bank to present technicalities to maintain no wrongdoing, but corporate ethics demand a more transparent approach. What is needed in the interests of transparency and to restore the confidence of all concerned is a full disclosure of facts. What stopped Chanda Kochhar from recusing herself from the credit committee when the matter of Videocon was being heard, by disclosing to the board that her husband had business interests with Dhoot? Was the ICICI Bank board aware of Rajiv Kochhar’s business dealings and, if so, why did it turn a blind eye? Did it not anticipate trouble in future, especially since 86 per cent of the loan (Rs 2,810 crore) provided by the bank to Videocon was declared an NPA in 2017? Iconic institutions cannot be allowed to go to ruin because of the misdoings of their managements. Swift and stern measures need to be taken to restore the bank’s credibility and reassure the public that they can fully trust their money with it. However, laws alone are not the answer. Laws are one thing. The final onus is on the individual,” says Maira. “It is a reflection of one’s character.”
“Crony capitalism has compromised the integrity of Indian banks. A radical overhaul is needed” Meera Sanyal former CEO, Royal Bank of Scotland in India
IN EXIT MODE Axis Bank MD and CEO Shikha Sharma
Public sector banks Private banks