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

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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.

FULL DIS­CLO­SURE

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

RACHIT GOSWAMI

IN EXIT MODE Axis Bank MD and CEO Shikha Sharma

Pub­lic sec­tor banks Pri­vate banks

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