Credit cycles often leave a long trail. Loans gone bad. Firms weakened. Banks shaken-up. Bankers ousted. It’s often long after the cycle has turned that the complete picture starts to emerge.
In India, the implications of the aggressive lending cycle at the start of the decade are only now starting to fully reflect.
The cycle has been vicious on Indian banks. It first weakened public sector banks, which controlled nearly 70 percent of the loan market. It forced the government to shell out for Rs 2 lakh crore in recapitalisation money and more may be required.
Private banks, which boasted, falsely as we now know, of pristine asset quality and strong credit appraisal processes, were forced by the regulator to not just recognise stressed assets but also disclose the extent of under-reporting to their shareholders. And now, perhaps finally, that has led to a churn at the top of three large private banks.
Since the start of the year, India has seen the banking regulator ask CEOs of Axis Bank and Yes Bank to end their tenures. The CEO of a third lender – ICICI Bank – is under investigation for alleged impropriety in loan approvals.
“When we began the year in 2018, little would we have thought that we should see such a shake-up in private sector banking,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services, a long time consultant to Indian banks.
The RBI has always collected information through its supervision department and taken a view. But what seems to be happening of late is that the regulator is becoming far more active and perhaps rightly so.... At the end of the day, the regulator is responsible for stability of the system and for depositors’ interests.Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services
Rana Kapoor: A Founder CEO Ousted
The most recent casualty has been Rana Kapoor, one of the founders of Yes Bank. On Wednesday, the bank informed stock exchanges that the RBI had only given a three month extension to Kapoor instead of the three year term that the board had approved and sought RBI’s nod for. The RBI’s reasons for doing so are not in public domain. However, it has been widely believed that the regulator has raised concerns about accounting practices and governance standards at the bank. The former came to light when the RBI asked banks to start disclosing ‘divergences’ in the quantum of bad loans assessed by a lender and the regulator.
While all banks reported such divergences, the numbers were large for Yes Bank in percentage terms. In FY16, the bank had reported bad loans which were only one-sixth of the bad loans as assessed by RBI. In FY17, the divergence in bad loans was three times the reported bad loans.
Even in the past, the regulator had raised concerns with the Yes Bank top management and called in the bank’s chairman and CEO for conversations, said a person directly familiar with the matter. But at that time, the bank was asked to mend its ways and certain correctives were prescribed, said this person. This time, however, the RBI appears to have taken a stronger stance, going by its decision to give Kapoor only a three month extension.
With the RBI’s decision now in place, Yes Bank has a number of questions facing it. Who will take over? Kapoor has not put in place a clear second line of command, leaving investors wondering whether an outsider would be brought in. Kapoor and his family also hold about 10 percent in the bank. Will he remain on the board? If so, will the new leadership be able to start with a clean slate?
Shikha Sharma: The Price Of Growth
Kapoor’s exit was not entirely surprising. In April, the RBI had chosen to send back a recommendation from the Axis Bank board to reappoint Shikha Sharma as CEO. Sharma had spent nearly a decade at the lender and used that period to chart an aggressive growth strategy.
Her term coincided with the great infrastructure lending boom, which made growth look easy. But as the cycle turned, Axis Bank was left with a much larger pool of bad loans than it started with. Not unlike Yes Bank, Axis Bank too reported a divergence in bad loan assessment, suggesting under-reporting.
Along the way, other lapses at Axis Bank had shown up.
During demonetisation, there were allegations of money laundering activity through some of the bank’s branches. In April 2018, the RBI dropped Axis Bank, which has been one of the largest importers of bullion, from the list of lenders allowed to ship in gold and silver for the current fiscal year.
Once again, the regulator did not give reasons for its decision to deny Sharma another three year term. But recent asset quality and process issues would have been likely part of the dossier that went against Sharma.
The bank has now appointed Amitabh Chaudhry as the MD and CEO to take charge starting January. The same time that Yes Bank will also welcome in a new CEO.
Chanda Kochhar: A Story Still Developing
While the fate of Kapoor and Sharma as chiefs of their respective banks has been decided, Chanda Kochhar still awaits a final call on her tenure. Kochhar’s story is similar to the other two, with an added element in the form of allegations of impropriety.
She took calls similar to Kapoor and Sharma.
They all went after loan book expansion, without accounting for risks that may emerge in later years. Large loans were approved even before there was adequate visibility on the viability of a project. Significant exposure with policy risk attached was added to the bank’s books. That exposure kept growing as the bank’s kept evergreening stressed loans. Finally, when the clean-up began, Kochhar’s ICICI Bank too saw a rise in bad loans and disclosed under-reporting of bad loans via divergences.
To top it all, allegations of quid pro quo in loan approvals emerged against Kochhar. Kochhar is under investigation and on leave from the bank. She has, however, held on to her post as chief executive officer.
Should she be cleared by the committee looking into the allegations, Kochhar could consider seeking a reappointment when her term ends in March 2019. But even in that scenario, it would not be unreasonable to ask whether the RBI would be reluctant to grant Kochhar an extension on grounds similar to those probably used for Kapoor and Sharma.
A Changed Regulator
The bigger message in the clean-up at private banks is that the regulator has decided to get tough. Its stance is being welcomed by some and questioned by others.
Those who welcome it say that the RBI is doing its duty in ensuring depositors’ interests are protected. It is also well within its rights to disapprove appointments of private bank CEOs.
Those who question it ask whether the regulator is being too subjective in its decision making. How does it define the ‘fit & proper’ rule used to judge the appropriateness of bank CEOs? And is it not upto shareholders and bank boards to decide on who is best placed to lead a bank?
That debate has just begun.
This article was originally published in BloombergQuiint.
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