Succession planning at pvt banks is a major issue: RBI on board governance

At a first-of-its kind open house with bank boards next month, Mint Road can be expected to do some plain speaking on long-festering issues of management and ethics

Mint Road’s decision to call for a meeting of the board of directors of state-run and private banks on May 22 and 29 to discuss “issues related to governance, ethics, the role of the boards, and supervisory expectations” needs to be read in the context of several long-standing concerns.

Succession planning at private banks is one hot button issue. On September 9, 2014, the Reserve Bank of India (RBI) made clear that the upper age limit for corner-room occupants in private banks should be 70 years. 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 had reported on April 24, 2019, that Mint Road 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, governor Shakikanta Das said that RBI 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 Sunil Gavaskar). Both Sobti and Puri bid their “byes” on March 23, 2020, and October 26, 2020, respectively, on turning 70.

Why is it that an RBI circular issued six years before the end of tenures of the two longest serving managing directors and chief executive officers (CEOs) is not taken as cue enough to get a succession process in place? Is it possible that the central bank feels that on several other counts as well, a “drift” may be on?

Penalties are another issue. The RBI’s Report on Trend and Progress of Banking in India for FY22 has it that during this period the major reasons for the imposition of monetary penalties on banks were due to non-compliance with exposure and IRAC (income recognition and asset classification), frauds classification and reporting, and violation of cyber-security framework guidelines. The average per instance penalty was the highest for private banks — up at Rs 29.31 crore in 16 instances from Rs 5.92 crore (3).

When it comes to frauds in banks (whatever their ownership), the RBI’s Annual Report for FY21 noted that the average time lag between the date of occurrence of a fraud and its detection is 23 months; for large frauds (Rs 100 crore and above), it was 57 months. This tardiness must be set against a two-decadal analysis by the Financial Stability Report of June 2019 (FSR: 2010), which observed that between FY01 and FY18, fraud constituted 90.6 per cent of what was reported in FY19, by value.

In September 2019, Deputy Governor M K Jain said: “It will not be an exaggeration to say that some of the big losses suffered by banks on account of frauds could have been avoided if a good compliance culture was ingrained in the respective banks.” And on Thursday, Das in his speech on “Future-Proofing the Indian Financial System” delivered at the College of Supervisors in Mumbai said: “Over-aggressive growth strategies or mindless pursuit of bottom lines, for instance, are often a precursor to future problems.” That regulated entities must demonstrate adequacy of internal controls and loss absorption capacity to match the risks that their business models may generate. “Our approach is to flag deficiencies in this area to the senior management or to the Board of Directors of individual institutions for remedial action.”

Now let’s look at the view from the other side of the fence — banks.

A controversial “Discussion paper on governance in commercial banks in India” (June 11, 2020) raised hackles at private banks. It held that CEOs are not to have a place on key board committees — remuneration and nomination; audit; and risk management. And key officials are to report to board-level committees, and not to the CEOs. A case was made through the Indian Banks’ Association (to the RBI) that this will dilute the position of CEOs under the Banking Regulation Act (BR Act), 1949, that states: “The management of the whole of the affairs of such a banking company shall be entrusted to a managing director who shall exercise his powers subject to the superintendence, control and direction of the board of directors.”

This discussion paper led to a few independent directors informally conveying to chairmen and CEOs that they would have to revisit their positions even as some of them reportedly raised the matter with the ministry of finance in their personal capacities. They do not want to be burdened with “executive roles” (save for in the credit committee) and their role has to be restricted to what they consider “strategic”.

Now, why did state-run banks not get hassled by the RBI discussion paper? This is because, while the applicability of the contents cut across banks, it had been qualified that “except in so far as what is prescribed is not inconsistent with the provisions of specific statutes applicable to them, or in case where the major shareholder/promoter viz., Government of India, retains its instructions”.

It’s possible that the RBI’s proposed interaction with banks’ boards flows from all these long-standing concerns, which had been aired, but banks may not have read the tea leaves.

On November 16, 2021, Das had spoken of the high expectations from the oversight role of bank boards. He made a pointed reference to the fact that certain banks had followed the high-risk and high-return business strategy, “with a skewed priority for serving only the interest of their investors”. And the role of the board, especially in challenging the proposals of the management, thus becomes critical. The cult of personalities on bank boards may well be over.

The proposed RBI-bank boards’ meeting is a significant first step following Finance Minister Nirmala Sitharaman’s announcement in the Union Budget for FY24 on the need for better governance and investor protection in the banking sector. To this end, Sitharaman had proposed certain amendments to the Reserve Bank of India Act, 1934; the BR Act, 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

Interestingly, the twin meetings slotted for May comes a month ahead of the release of the Financial Stability Report’s June 2023 edition.