Governance questions: HDFC Bank must emphatically address all concerns

HDFC Bank must address governance concerns transparently after reports of irregular payments linked to bulk deposits, while the RBI should clarify its oversight role

HDFC Bank, the country’s largest private-sector lender and the second-largest listed entity on Indian stock exchanges, is facing governance-related concerns for a second time this year. In the latest instance, The Indian Express reported last week that an internal probe found that the bank paid about ₹45 crore to Maharashtra State Road Development Corporation (MSRDC) over 2023-24 and 2024-25 from marketing expenses marked as “differential interest”. It appears that the bank promised the corporation a higher rate of return to get its bulk deposits, but the amount was shown as the bank’s marketing expenses rather than being credited as interest. It was also reported that the bank’s top management was aware of this development. There is often intense competition among banks to raise deposits, particularly current account and savings account (Casa). 

Regulations do not allow banks to negotiate interest rates with depositors. The Reserve Bank of India’s (RBI’s) master direction on interest rates on deposits states that commercial banks must maintain interest-rate cards for bulk deposits, and they cannot be negotiated between the depositor and the bank. Expectedly, the stock market reacted negatively to the report. The bank issued a statement, but it did not adequately address stakeholder concerns. It argued that all issues were dealt with in accordance with established norms, and rejected any assumption of wrongdoing. What the situation warranted was a categorical clarification on whether the report was correct and whether the lender had violated any regulatory norms. If the bank had indeed made the payment, as the report suggests, questions remain whether a similar model was followed for gaining other accounts or if this was an isolated incident. In fact, not only the bank but the RBI must also clarify. Since the central bank periodically inspects banks' books, did it find something like this? If not, it may consider expanding the scope of its supervision of regulated entities. 

The reported incident raises pertinent concerns because in March, the bank’s part-time chairman and independent director Atanu Chakraborty had resigned, stating that certain practices at the bank were not aligned with his values and ethical standards. A few days after his resignation, the bank asked some of its executives to leave over misselling concerns. It is still unclear what exactly Mr Chakraborty’s concerns were. The role of the regulator was questioned in this instance as well. However, since a fresh set of questions has been raised, the bank must address all related issues. It is vital to recognise that banking is not an ordinary business. The basic edifice of this business is built on trust, and it is important to maintain that at all times. Concern over governance issues can affect stakeholder confidence, potentially leading to significant problems for any bank. It is also worth noting that weakness in even a single bank can pose systemic risks to the broader financial system. 

Thus, there are strong reasons why banks are tightly regulated, and this episode also puts the onus on the regulator to ensure that the system functions smoothly. Understandably, the regulator may not wish to make public the shortcomings in a particular bank because doing so can create panic. However, the RBI must assure stakeholders that it is addressing the things that have been reported to have happened in a bank. In the present context, HDFC Bank’s management must come out and address all concerns. If there has been negligence, appropriate action must be taken, and systems must be strengthened to prevent a recurrence.

 

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