ANALYSIS | What is RBI trying to achieve from capping tenures of bank chiefs?

The Reserve Bank of India’s (RBI) move to cap the tenure of promoter shareholders as CEOs of private banks, on the face of it, seems to be badly thought through. The move is likely to impact only one bank -- Kotak Mahindra Bank -- headed by Uday Kotak (in picture), who is running it in an efficient way.

In the discussion paper released last week, the RBI said: “... it is felt that 10 years is an adequate time limit for a promoter / major shareholder of a bank as whole-time director or CEO of the bank to stabilise its operations and to transition the managerial leadership to professional management.”

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Even if RBI decides to go ahead with the proposed change, will it lead to massive leadership changes in the banks?

As on date, there are only two banks where promoters are heading the bank in an executive role: Kotak Mahindra Bank and AU Small Finance Bank.

No change till 2023

Comments on the discussion paper by banks have to be sent by July 15. These guidelines will come into effect six months after the final guidelines being placed on the website or April 1, 2021, whichever is later. So, in either case, it won’t be before the next financial year.

Since AU Small Finance Bank came into existence only in 2017, the CEO and promoter Sanjay Agarwal has time till 2027 to exit the bank.

Now come to Kotak Mahindra Bank, where MD & CEO, Uday Kotak, who is also the promoter of the bank, will see his current term expire by December 31, 2020. This, in essence, means that by the time RBI’s proposed regulation goes through, Uday Kotak would be in the middle of his new term.

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So, how is RBI proposing to deal with such a situation: Banks in which the above tenure has been met will have to identify and appoint a successor in two years or the expiry of the current tenure, whichever is later. It won’t be before 21 months that Uday Kotak will have to step down if this proposed regulation sets in at its earliest possible deadline.

Kotak’s spokesperson did not respond to an email query by DH.

Is it fair?

Does Uday Kotak qualify to step down?

It is understood that the move was necessitated by the collapse of YES Bank, where its former promoter Rana Kapoor, through a slew of scams, brought down his own bank.

“RBI, in the past, has had a bad experience with promoters of Global Trust Bank, Bank of Rajasthan, YES Bank and many such promoter-sponsored banks and hence recommended a 10-year tenure for the promoters. RBI feels it is safeguarding the financial institution,” international investment bank Macquarie said in its note.

Now, rather than going by objective evaluation, by imposing a blanket cap on the tenure of banks’ promoter CEOs, RBI is essentially equating Uday Kotak with Rana Kapoor -- which many on Dalal Street see as outrageous.

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Uday Kotak is a prudent and conservative banker, which runs contrary to Rana Kapoor’s flamboyant way of functioning. Kotak Mahindra Bank, under his leadership, has grown to be one of the top five lenders in India. The numbers and the balance sheet of Kotak Mahindra Bank say that it is one of the safest banks in the current ecosystem: Net NPAs at 0.71%, capital adequacy ratio at a healthy 17.9%, provision coverage ratio of 69%, and a strong CASA Ratio of 56.2%.

What is more, on the face of it, the bank doesn’t have much of risky exposure: total special mention accounts (SMA)-2 -- ones with a repayment delay of between 61 and 90 days -- for the bank are only worth Rs 96 crore (0.04% of net advances).

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“Uday Kotak has run the bank in an exemplary way. He could have been the CEO for another nine years (till he would have turned 70) but his tenure could be cut short to less than 3 years with effect from today assuming RBI’s draft guidelines become final with no changes and April 2021 is the date when these guidelines would be applicable,” Macquarie added.

The proposal also says that the non-promoter CEOs can stay for a tenure of 15 years. In such a scenario, Aditya Puri of HDFC Bank has stayed at the helm of affairs for 25.7 years now and the succession is set to take place in October 2020, as he turns 70.

While there have been many operational decisions for which HDFC Bank could be criticised, Puri, on the face of it, seems to leave behind a healthy bank.

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Other than HDFC Bank, the CEOs of RBL Bank and Federal Bank have served tenures of about 10 years already and they will have at least another five years before having to make the transition.

Banking industry sources told DH that this could be seen as a move to prevent bank chiefs from consolidating the power at the top. But there needs a subjective evaluation of it: Chanda Kochhar was only nine years at the helm of ICICI Bank when she had to step down due to alleged malpractices in lending. It is alleged that she started taking kickbacks within three years of her becoming CEO.

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So, does curbing the tenure of executives prevent consolidation of power? It’s difficult to give an objective assessment to it. What RBI needs to rather do, is to increase the governance standards for the boards of the banks. In the case of YES Bank, the erstwhile board -- including independent directors and the celebrated RBI nominee director -- failed the expectations of the investors every time they announced that fundraising plan is on course.

“Inviting discussion on improving governance at banks is definitely good but my gut feel is this entire discussion paper smells of a hit job. Targeting only one bank (Kotak) which has less than 2% market share of the banking industry, while problems have been in the balance 98%,” an industry source told DH.

In fact, entire non-promoter run private banks, PSU banks and FIs are in a mess! In many of these banks and institutions, RBI was sitting on the board.