How l'affaire RBL Bank may impact RBI's equation with entities it regulates

Private banks' CEO tenures have been in the spotlight since the RBI released its discussion paper on governance in commercial banks in 2020

The Reserve Bank of India (RBI) and the entities it regulates may have to engage much more closely after the turn of events at RBL Bank. The resignation of Vishwavir Ahuja as its managing director (MD) and chief executive officer (CEO), and events in the run-up to it, have caused major unease in the banking fraternity.

The RBI’s clarification after Ahuja’s departure that “the appointment of additional director/s in private banks is undertaken under Section 36AB of the Banking Regulation Act (BR Act: 1949), as and when it is felt that the board needs closer support in regulatory/supervisory matters,” has only muddled matters, since the statement also said that the bank was well capitalised and its financial position was satisfactory. When was the last time the RBI took an “all is well” stance, having appointed an additional director to a bank’s board?

It’s also tough to take at face value that the RBI thought it fit to appoint an additional director to RBL Bank’s board for the first time after it began life in 1943. Ahuja and his A team were blessed by the RBI top brass in 2010 to steer the then beleaguered Ratnakar Bank. It could be argued that “fit at the time of appointment” of a bank’s boss doesn’t imply the incumbent is “fit for perpetuity”. But the regulator’s follow-up statement doesn’t convey that this was the case.

Did the bank adopt a high-risk business model as evidenced from a rapid increase in its restructured book to 3.35 per cent in Q2FY22, from 0.09 per cent a year ago? Not necessarily. Stress has gone up in the books of all banks since the pandemic broke out.

Long-term impact

There are whispers that RBL Bank may have been under pressure from private equity (PE) investors to deliver high growth. True or not, this throws up another irritant. The RBI’s Internal Working Group to review ownership guidelines for private banks has said that as regards non-promoter shareholding, current long-run shareholding guidelines may be replaced by a simple cap of 15 per cent of the paid-up voting equity share capital — for all types of shareholders. Fresh capital is unlikely to flow into private banks if large investors feel they may be held captive to regulatory mood swings.

The tenures of MDs and CEOs of private banks have been under the spotlight ever since the RBI released its June 2020 Discussion paper on Governance in Commercial Banks in India. On April 26, 2021, it imposed a cap of 12 years and 15 years on the stints of promoter and professional CEOs, respectively, in private banks, with the maximum age capped at 70 years.

It had earlier issued another diktat requiring chief risk officers, chief compliance officers, chief vigilance officers, and human resource heads to report to the board (not to bank CEOs), and stipulating that one-on-one meetings should be held with board committees — without CEOs present. This was seen as being out of kilter with the BR Act, which says: “The management of the whole of the affairs of a banking company shall be entrusted to an MD who shall exercise his powers subject to the superintendence, control, and direction of the board of directors.” Independent directors now don’t want to be burdened by operational issues, and some are keen to walk out.

All this has led to considerable unease in private banks.

Take the cap on tenures. Long-standing helmsmen at a couple of private banks may have harboured ambitions to stay longer. But their hopes may have been triggered by the RBI’s decision to peg the retirement age of private bank heads at 70 in September 2014 (from 65 earlier) — when the Companies Act (2013) replaced the one enacted in 1956. This move had been contrary to the P J Nayak Committee submission that 65 be set as the ceiling.

Private banks may shy away from lending after what’s happened at RBL Bank. This has other implications. The RBI’s Report on Trend and Progress of Banking in India 2018-19 referred to the sharp fall in both incremental and outstanding credit of state-run banks. This was because nearly a dozen state-run banks came under the RBI’s prompt corrective action framework, sending the share of private banks in incremental credit shooting up to almost 100 per cent. It has remained very high since then. If private banks were now to hold back from leending, India Inc will suffer.

Speculation has it that the RBI acted the way it did after the blowout at Punjab National Bank; Chanda Kochhar’s departure from ICICI Bank under a cloud; and the mess at ILFS, Dewan Housing Finance Corporation, YES Bank, and Punjab and Maharashtra Co-operative Bank. It showed the RBI in poor light, came at a substantial cost to the exchequer and caused instability in the wider financial market. Yet, no heads rolled in the RBI’s supervisory departments.