India’s two big private sector banks, ICICI Bank and Axis Bank, are in the news for a variety of issues including fudging bad loans, inadequate disclosures of related party deals, mounting non-performing assets (NPAs) and worse. A third, IDBI Bank, would be in danger of going belly-up or taken over if it was not a government bank. All this is spilling into the public domain, just after Governor Urjit Patel of the Reserve Bank of India (RBI) chose to go public with the claim that he has no powers over public sector banks (PSBs), which account for the bulk of the bad loans, but accepted full responsibility for private sector banks. So far, the RBI has maintained a public silence, while choosing to operate through leaks to select newspapers. So media reports say that RBI has asked Axis Bank to reconsider the decision to re-appoint Shikha Sharma as CEO (Chief Executive Officer) for a fourth term. Ms Sharma’s fourth term was set to begin in June 2018. Axis Bank has suffered a spurt in NPAs by 336% in the past three years. The bank’s gross NPAs were Rs1,173 crore at end of December 2009 ad have jumped to Rs25,001 crore at end of December 2017.
But there is no word from the banking regulator on ICICI Bank, where the bank chairman MK Sharma as well as a former Chairman N Vaghul have jumped up to defend its Managing Director (MD) and CEO Chanda Kochhar, when a spate of rather serious charges have been spilling out in the media while the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) are understood to have started a preliminary investigation.
At ICICI Bank, the main charge is that Videocon group had some dealings with Deepak Kochhar’s firm (Mr Kochhar is the husband of Chanda Kochhar) as part of an alleged quid pro quo for having a loan sanctioned. It is further alleged that Ms Kochhar was part of the credit committee that sanctioned the loan of Rs3,200 crore as part of a 20-bank consortium. While the Bank has defended Ms Kochhar, the fact that the Videocon group is a giant defaulter after borrowing over Rs40,000 crore to a consortium of banks has brought the deal under the scanner of investigation agencies. But this is not all. There are also reports that Avista Advisory, a firm set up by Rajiv Kochhar, who is Ms Kochhar’s brother-in-law and brother of Deepak Kochhar has been a consultant to several borrowers of ICICI Bank. In this case, the bank reportedly told firstpost.com a digital news portal, that there was no need to report these transactions since a ‘brother-in-law’ was not listed as a ‘related party’ under the corporate governance reporting requirements.
The Indian Express newspaper has reported
that - "Avista Advisory, founded by Rajiv Kochhar, who is the brother-in-law of Ms Kochhar, got the mandate to restructure foreign currency-denominated debt deals worth over $1.7 billion of seven companies over the last six years. All these companies were borrowers of ICICI Bank at the same time. In at least one of these deals, ICICI Bank was the lead bank of the lenders. According to disclosures made by Avista Advisory, the company acted as an advisor in restructuring debt of Jaiprakash Associates, Jaiprakash Power Ventures, GTL Infrastructure, Suzlon, JSL and Videocon Group".
The loss making IDBI bank continues to make news for a spate of loan frauds — starting with the dubious loan to Vijay Mallya against the Kingfisher brand, to Rs750 crore of fraudulent transactions in Andhra Pradesh by illegally enhancing limits on the kisan credit cards, ostensibly for farm loans and pisciculture loans.
All these raise questions about the quality of RBI’s bank supervision as well as the wisdom of its bank licensing policies. All three banks mentioned above are technically classified as 'private banks’ as part of RBI’s new bank licenses in the 1990s but have public sector origins. Two were development finance institutions and one was floated by the giant Unit Trust of India (UTI), before it had to be bailed out and split.
Consider RBI’s actions so far. There is a paltry penalty of Rs3 crore on Axis bank for non-compliance with its directions on income recognition and asset classification (IRAC) norms for FY2015-16. Not a word about the fact that the performance bonuses, stock options and increments of private bank CEOs are huge and based on performance. So a mere penalty of Rs3 crore that will be at the cost of Axis Bank CEO’s is to punish shareholders while the only action against the CEO is to deny her a third term.
Neither RBI not the Securities and Exchange Board of India (SEBI) have said a word on the role of the board of directors and the audit committee, which clearly cleared the fudged or inflated numbers. The regulator has been busy with commissioning and studying and corporate governance report.
Last year, in October, RBI also imposed a penalty of Rs6 crore on Yes Bank and Rs2 crore on IDFC Bank for violating various norms set by the regulator — that these new private banks have been punished by a regulator reluctant to punish, tells its own story.
Some senior academics have also begun to raise questions about the most successful private bank, which has had the same CEO for over 25 years. While investors are happy with the bank’s performance, it does beg the question about why independent directors should be restricted to three terms of three years each if no such norms exist for the CEO and managing director.
History shows that RBI never used its powers judicially and had allowed even private banks to get away with miniscule penalties. Last week, RBI fined ICICI Bank Rs58.9 crore for violating norms relating to sale of government securities from the held-to-maturity category of its bonds portfolio. This was the highest penalty imposed by Reserve Bank on a lender in a single incident. The questions being raised are more serious than these infractions. Since the RBI governor claimed that he has powers over private banks, when will see them in action?