How is RBI Deciding the Fate of Indian Bank CEOs?

To say the Indian banking sector is in turmoil is an understatement. The NPA crisis has only snowballed since getting started with no end-point in sight. Lawyers, insolvency professionals, borrowers, and banks are having a field day in and around our country’s bankruptcy tribunals. What was condescendingly declared as an issue sitting within public sector banks quickly morphed into something much broader, catching private sector banks off guard.

 

Side drama is not in short supply, with intermittent episodes showing newer governance lapses. In an almost seasonal fashion, we had the PNB scam end of winter, Chanda Kochhar’s conflict of interest saga early summer, now the IL&FS debt crisis kicking off autumn.

 

Whips are being cracked, albeit selectively. Case in point being RBI’s actions on private bank CEOs. First casualty was Shikha Sharma, Axis Bank CEO, whose term extension was reduced to year end (instead of the original request which would have lasted her tenure till 2021). Surge in bad loans and systemic lapses were reportedly cited as reasons by the Central Bank. More recently, similar fate befell YES Bank’s promoter and CEO Rana Kapoor, whose tenure was also shortened till Jan 2019, a position he has enjoyed for 15 years since founding the financial institution. Weak compliance culture, weak governance, and wrong asset qualification reported as drivers.

 

Mr. Kapoor’s ‘dismissal’ is different from Ms. Sharma's. Unlike the latter, he is in effect a 20% shareholder in a ‘not so much’ widely-held stock. No wonder the share price tanked -29% the day after, partly due to the shock value of dismissal, part because of fears around regulatory over-reach and the possibility that the RBI may know something about YES Bank’s asset quality that investors don’t.

 

In any case, it is interesting to assess if the Central Bank is following any recognizable logic while dismissing top management. Let us first ignore that a similar crackdown hasn’t transpired across public sector banks. But that question, to start with is too distant from the doors of logic, so better to ignore.

How Is RBI Deciding The Fate of Indian Bank CEOs? 

I map India’s 6 biggest private sector banks on a few common criteria. Aside from type of ownership and entrenchment of CEO, former denoted by share of promoter holding and latter by length of tenure, I also lay down the bank’s expected Return on Equity and Loan growth (to indicate management’s ability to generate profitability and grow) and its forward P/B or price to book ratio (indicating investor’s perception of the bank’s valuation). Lastly, have included the bank’s net NPA ratio to indicate the size of its bad loan problem. The results of this exercise and its comparison against RBI’s recent decisions have been revealing.

How is RBI Deciding the Fate of Indian Bank CEOs?
Source: Market data and Company disclosures

Interestingly, YES Bank and Axis, whose CEOs have been shown the door are not the worst when it comes to NPAs, ROEs, P/B and loan growth. In fact, YES Bank has shown best-in-class growth and returns and the second lowest proportion of NPAs.

 

Though Axis Bank is an underperformer and perhaps Ms. Sharma as a result deserved the action taken against her, she would perhaps sit in the same category as ICICI/Ms Kochhar, the latter demonstrating the slowest growth, the highest NPAs, and a much more questionable reputation.

 

The logic behind Mr. Kapoor’s dismissal is elusive. Based on this framework, it could might as well be Mr. Puri, Mr. Kotak, or Mr. Sobti, all enjoying equivalent terms in their respective institutions, equivalent performances to Mr. Kapoor, and a certain degree of entrenchment.

 

It is good that the RBI is cracking the whip to resonate across D-street, but it needs to demonstrate a certain degree of fairness and transparency while it does so. Managing expectations could go a long way to maximise shareholder interest, instead of delivering shock value which has become its norm lately.

 

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