Upping corporate governance premium in private banks: What to expect

Mint Road’s directive last week to private banks that they onboard “at least two” whole-time directors WTDs) — including the helmsperson — has made it clear there’s to be no drift on the succession planning front going ahead. Less explicit is that only WTDs can move into the corner rooms.

The Reserve Bank of India (RBI) has ensured that the process of selecting the next set of managing directors (MDs) and chief executive officers (CEO) of private banks will be streamlined. The first two test cases will be that of Murali Natrajan of DCB Bank whose tenure is to end on April 28, 2024, and Shyam Srinivasan of Federal Bank (September 22, 2024). Both Natarajan and Srinivasan would have completed their respective 15-year innings at the banks they helm — the maximum period allowed by Mint Road.

Succession planning at private banks has always been a hot-button issue.

Mint Road had stated that the upper age limit for corner-room occupants in private banks would be 70 years on September 9, 2014. Yet, much drama unfolded in the race to find successors to both Romesh Sobti at IndusInd Bank and Aditya Puri at HDFC Bank. Business Standard reported on April 24, 2019, that the banking regulator had been “informally sounded out” whether it can look into the matter of increasing the age limit for directors on banks’ boards to align it with the Companies Act, where the prescribed age limit is 75 years.

Almost a year later, RBI Governor Shakikanta Das said that the banking regulator will not be giving in to the demand to up the retirement age of private bank chiefs. “One must retire when people ask ‘why’ and not ‘why not’,” Das said (quoting cricketer Sunil Gavaskar). Both Sobti and Puri bid their goodbyes on March 23, 2020, and October 26, 2020, respectively, on turning 70.

The point is that despite an RBI circular being issued six years before the end of tenures of the two longest-serving private bank MDs and CEOs, it was not taken as a cue enough to put a succession plan in place.

Even when Mint Road released its subsequent discussion paper on ‘Governance in Commercial Banks in India (June 11, 2020)’, it was said that a few large institutional investors wanted visibility of the MD & CEO’s tenure at a time when many banks were at a critical stage in their capital raising plans after the Covid pandemic. It was also pointed out that abrupt changes in corner rooms could have a bearing given that a one-time loan-recast policy was also in the works at that point in time.

Yet, there could be a surprise in store when private banks actually get down to appoint WTDs.

It would be misplaced to assume that senior personnel in banks are eager to take up the role of WTDs — even if this puts them in the bracket to get a shot at the top job. There is said to be reluctance among some as it would mean that their compensation package would need Mint Road’s nod. While there’s a view that this should be left to market forces, the reality is that under the Banking Regulation Act (1949), the banking regulator has a say in this matter. 

It’s also well known that in some cases, the nomination and remuneration committee had appeared to be toeing the line of the corner-room occupant.

The other key aspect in Mint Road’s communique on WTDs of October 25 is the following lines: “Given the growing complexity of the banking sector, it becomes imperative to establish an effective senior management team in the banks to navigate ongoing and merging challenges.”

There is another layer of complexity here.

Das noted at the Business Standard BFSI Insight Summit 2023 on October 31, 2023: “We are also looking at the rate of attrition as part of our supervision, which is seen to be high in certain private sector banks and we have asked them to look at it because, at the end of the day, every bank has to build up its core team, which should grow with the bank over the years.”

But how can private banks retain their pool of senior talent? For instance, non-banking financial companies (NBFCs) — at least the top-line players — can shell out much more to their senior management (this is not to suggest that NBFCs’ pay is leading to attrition at private banks.) And the stress on two WTDs would call for a relook at the batting order in several of these banks.

The bigger picture is that the gap in corporate governance standards between state-run and private banks is widening.

Recall this from the P J Nayak Committee to Review Governance of Boards of Banks in India released on May 13, 2014. On state-run banks, it said: “In one bank, the taxi-fare reimbursement policy gets the same coverage as the NPA (non-performing assets) recovery policy.” It threw light on other non-strategic issues which figured in board meetings — the purchase of office premises, provision of leased residential accommodation for officers, details of a lecture by a bank’s boss at a college, the extensive coverage of the finance minister's visit to the bank, and disciplinary action against manager-level employees.

That said, expect Mint Road to continue to turn up the burner on corporate governance in private banks.