HDFC Bank chairman's resignation puts bank governance in spotlight

The next round of appointments to private bank boards following Atanu Chakraborty's resignation as HDFC Bank chairman will be subject to intense scrutiny by the RBI

The turn of events at HDFC Bank should not be seen as an episodic affair. 

It puts the spotlight on issues flagged by Shaktikanta Das as Reserve Bank of India’s (RBI’s) governor back in May 2023. In a first-of-its-kind outreach with the boards of state-run and private banks — with the participation of deputy governors, and executive directors of three key departments (supervision, regulation, and enforcement) — he held forth on governance, ethics, the role of the boards and supervisory expectations. 

“We have noticed the dominance of CEOs in board discussions and decision-making. It has been seen in such cases that boards are not asserting themselves,” he said. 

“We would not like this type of situation to develop.” 

Unforeseen  

What Das and the central bank’s brass did not pencil in is a situation where the chairman of a bank — Atanu Chakraborty of HDFC Bank in this case — turns against the managing director and chief executive officer (MD & CEO) (Sashidhar Jagdishan), and leaves in a huff.  

Chakraborty stated in his resignation letter that “Certain happenings and practices within the bank, that I have observed over the last two years, are not in congruence with my personal values and ethics”.  

But Mint Road’s statement came across as dismissive of this. It said HDFC Bank is a domestic, systemically important bank with sound financials, a professionally run board and competent management team. 

“Basis our periodical assessment, there are no material concerns on record as regards its conduct or governance. The bank remains well-capitalised and the financial position of the bank remains satisfactory with sufficient liquidity.” 

Expectations of IDs 

As for independent directors (IDs), Das had stated, “It is necessary that IDs are truly independent — that is, independent not only of the management, but also of controlling shareholders while discharging their duties.”  

They were to always remember that their loyalty was to the bank and no one else, expected to ask pertinent questions and obtain the required information from the management before taking decisions.  

Perhaps aware this may ruffle feathers, he qualified, “I am not advocating any confrontation, but only stressing the need for the required level of alertness among all directors.” 

Here too, there’s nothing in the public domain (as on date) to suggest that IDs on HDFC Bank’s board took on some of the contentious aspects which apparently figured in the meetings. If at all matters were serious at HDFC Bank, the IDs would have likely shared them with Mint Road. But then, are we expecting too much of IDs in general?  

“If you expect IDs to protect corporate governance by applying a good safety net or to contribute in taking business to greater heights, you are mistaken,” said Subash Garg, former union finance secretary.  

“What is their stake? What do they have to lose? Most of them are happy making lofty statements or asking some questions to justify their pay-checks.” 

The IndusInd affair 

Harsh as Garg comes across, it was felt the governance narrative had changed after the blowout at IndusInd Bank last year (it was brewing though). That the bank was on the banking regulator’s radar was evident in March 2023 when Sumanth Kathpalia, its MD and CEO, was reappointed with a two-year term — not the three years as the board had recommended.  

While the RBI never gives the reasons for the curtailment of a bank boss’s tenure, what this move does tell you is the marked difference in the reading of the situation between IndusInd Bank’s board and Mint Road. “It can’t be that board members made a case for Kathpalia’s re-appointment twice over for a three-year stint, and the RBI declined the proposals,” said a source. 

In its aftermath, the central bank’s senior supervisory managers started to ask searching questions on the agenda presented to boards, the time spent in discussing specific items, and the observations made by IDs. And variances, if any, in board meeting audio recordings and the minutes presented were gone into. Banks were also made to revisit the implementation of the RBI’s master direction on corporate governance (May 18, 2016); and the circular on governance in commercial banks (December 2, 2021).  

Back in play was a key, decade-old circular (May 14, 2015) which did away with the ‘calendar of reviews’ — a rigid framework requiring boards to review 21 preset items. It had observed that it took up considerable time and, as a result, boards “may not be in a position to give focused attention to matters of strategic and financial importance”. And it advised banks to determine the agenda and periodicity of meetings, with the approval of their boards, so that there was adequate focus on matters of strategic and financial importance.  

It’s unlikely HDFC Bank would have slipped up on these matters. That said, senior financial services watchers are of the view that it is impossible to issue a circular or regulate for every eventuality.  

“You have very senior people on the board. And you expect them to behave like adults and resolve issues between themselves. The point is also that you can’t have a regulation for every eventuality, certainly not for personality conflicts,” said Amit Tandon, founder and MD, Institutional Investor Advisory Services. 

Private vs state-run banks 

Why is it that among the RBI-regulated entities, it is private banks which usually hit the headlines for the wrong reasons — be it ICICI Bank, Yes Bank, IndusInd Bank or Karnataka Bank?  And now what was considered to be the standard-bearer for governance in the financial services space, HDFC Bank?  

State-run banks and non-banking financial companies (NBFCs) never get called out for governance with the frequency of private banks. 

“In the case of state-run banks, the government calls the shots; in NBFCs (non-banking financial corporations), the bigger among the lot have a large corporate group as promoter. Here the wiggle room for personalities is limited,” said a senior banker.  

On state-run banks, former governor Y V Reddy noted back in 2005 that some aspects of governance (though they have a bearing on prudential matters), are exempt from the relevant provisions of the Banking Regulation Act (1949) as they are governed by the respective legislation under which they were set up.  

While the approach of the RBI has been to ensure, to the extent possible, uniform treatment of state-run and private banks with regard to prudential regulations, on governance, Reddy said, “The RBI prescribes its policy framework for private banks while suggesting to the government the same framework for adoption, as appropriate, consistent with the legal and policy.” These concerns are yet to be addressed. The short-point: It could be that the state-runs may not be exceptional in governance. 

The developments at HDFC Bank will cast a long shadow. 

It comes at a time when the Department of Financial Services has taken up the transition path for NBFCs to become universal banks. Playing in the background is the RBI’s Internal Working Group (IWG) to “Review extant ownership guidelines and corporate structure for Indian private sector banks” (November 20, 2020).  

It had made a case for large corporate and industrial houses as promoters of banks. It was for large NBFCs (with an asset size of ₹50,000 crore and above, including those owned by corporate houses) to be considered for conversion into banks — this, even as substantial investments have flowed into the financial sector in recent months. 

Looking ahead 

The next round of appointments to private bank boards — be they of chairmen, MD and CEOs or IDs — will be subject to intense scrutiny by Mint Road; many aspirants may well feel it is not worth the trouble. Worse, the mess at HDFC Bank has hit the headlines at the wrong time – when geopolitics is going through a churn and its impact on our economy is to be tracked.  “As a civil servant who has held senior positions, Chakraborty could have simply resigned on ‘personal grounds’,” said a banker. 

Jagdishan’s term as the corner-room occupant is up for renewal in October this year, and here’s the irony. In his note to shareholders (in the first annual report after he became boss at HDFC Bank), he was upfront on shortcomings — rare among CEOs in India Inc. “In the last 28 months, we have been in the spotlight for the wrong reasons when it comes to technology,” he said. “Also, there have been deficiencies in compliance… As a bank, we are certainly sorry for what has happened.”  

It was reflective of his baptism by fire in the eight months after he took over from his larger-than-life predecessor and mentor, Aditya Puri. The RBI had censured the bank for frequent technology outages and embargoed it from issuing credit cards and fresh launches under the ‘Digital 2.0’ initiative. It also conducted a third-party audit of the bank’s information technology systems. 

It will be interesting to watch out for his communique in the bank’s annual report for FY26.

 

Banking on boards

• Spotlight on governance issues flagged by Shaktikanta Das as RBI governor
• In a first-of-its-kind outreach with the boards of state-run and private banks in 2023, he held forth on governance, ethics, the role of boards, and supervisory expectations
• Personality cult in banks needs to be addressed
• Role of independent directors (IDs) may again need to be revisited
• Mint Road may up scrutiny of bank boards
• Developments at HDFC Bank come at a time when the Department of Financial Services has taken up the issue of NBFCs to become universal banks in recent meetings