Lakshmi Vilas Bank and Dhanlaxmi Bank: Self-Inflicted Existential Crisis? -Part 1
Corporate governance issues continue to rock Indian banks in the State as well as private sectors. In case of the State-owned public sector banks (PSBs), the government does not wish to keep them at an arm’s length; rather it often goes to the extent of micro-managing PSBs’ affairs, leaving the blame on the banks for poor performance. In the private sector, either all powerful top management teams or selected directors of their boards call the shots, with little concern for governance standards, sometimes compelling truly ‘independent’ directors to quit. The consequences in both cases are identical: the banks’ growth gets stunted, often leading to serious setbacks. They could also cause an existential crises as happened recently with Punjab and Maharashtra Cooperative (PMC) Bank and Yes Bank.
A Similar Organizational Culture
LVB and DLB, were set up in the 1920s in Karur (Tamil Nadu) and Trissur (Kerala), respectively, by local businessmen. Both had small business units and individuals as their targeted client base. For long, their operations were restricted to these two states, like many other banks established in these states.
By the turn of the century, both banks decided to change their business model with the objective of growing big fast. Their script and goals were identical. Top management was changed in the hope that they would help transform the banks into pan-India, tech-savvy, diversified financial institutions. Herein were sown the seeds of the current imbroglio. Although there are similarities between the two banks, the dramatis personae in each were different. A little elaboration on each bank will put issues in perspective.
The DLB Saga—Controversial Leadership Changes
The success of any changeover is predicated on effective and continued leadership. This was missing in DLB which saw frequent leadership changes.
The Bank had seven CEOs between 2003 and 2020; five of them did not last their full term. The first three, G Muthuswamy, TR Madhavan and Amitabh Chaturvedi, resigned because of the differences with the board.
Amitabh Chaturvedi, however, did push through the transformation exercise. He went after big corporates for business; introduced lateral recruitment on contractual basis to bring in staff with much higher compensation packages than those of regular employees. This had twin disadvantages. The bank’s fortunes were linked to the performance of the borrowers and the new entrants on contract caused a cultural conflict as they had no attachment to the Bank nor were they really looking for career advancements. This resulted in a lack of institutional commitment and only added to cost.
The period saw a series of industrial relations (IR) issues triggered by the fact that the officers’ association perceived a risk inherent in the new practices introduced by Mr Chaturvedi. For instance, recognising income before the interest was actually realised, unilaterally debiting customers’ savings bank accounts for service charges, collecting processing fee before a loan was actually released, were all against the standard banking practices. The association questioned such window dressing. When the bank did not take corrective measures, the association wrote to the Reserve Bank of India (RBI), which undertook an investigation of ‘fudging’ the income account to show inflated profits. That further strained the relationship.
Mr Chaturvedi’s time, no doubt, saw business grow rapidly. Between 2008 and 2011, the total business scaled up to Rs24,000 crore from Rs6,500 crore.
Simultaneously, expenses started outstripping income. The capital adequacy ratio fell to 10.81% in 2011 from 14.44% in 2009. This expansion was clearly not sustainable. Yet, his term was extended by another three years in 2011. However, he could not carry the board with him on his much-touted strategy of going after big business and was forced to quit early.
His two successors PG Jayakumar, an internal man, and G Sreeram, a former executive of Canara Bank, held the fort without any course correction. In July 2018, T Latha, a former executive of Punjab National Bank (PNB) was appointed CEO for three years. But in October 2019, she resigned on account of certain issues at PNB.
In February 2020, Sunil Gurbaxani was appointed the CEO, who had to lose his new job during the AGM Dhanalaxmi Bank.
A Divided Board
DLB board has been a divided house for a long time. Directors would interfere in day-to-day matters causing conflict with the top management. The premature departures of Mr Muthuswamy and Mr Madhavan followed such conflict. Mr Chaturvedi was able to get along with the board for some time with a clear strategy. But eventually he also quit prematurely. His successor, G Sreeram had no independent mind of his own and played second fiddle to the controversial chief general manager P Manikandan.
Mr Manikandan, who was a mid-level officer in Canara Bank, had joined DLB early this century; he rose quickly in the hierarchy to become chief general manager, bypassing several old-timers in the Bank. Enormous powers were concentrated in him as corroborated by later developments.
Between 2015 and 2019, several professionals on the board quit the Bank. In 2015, K Vijayaraghavan, an independent director, was shunted out. In April 2016, K Jayakumar, a highly respected director (who was a former chief secretary of Kerala), resigned. His letter of resignation made a searing indictment of the top management and the board.
In June 2020, the non-executive chairman, Sajeev Krishnan, a former CGM of SBI, resigned before the end of his term; along with him two independent directors, KN Murali and G Venkatanarayanan also put in their papers. That was a red flag again.
The Contributing Factors
Three internal factors have led to the current mess in DLB.
1. Inadequate checks and balances over critical wings of power;
2. Failure to take the stakeholders at different levels along with the proposed change; and
3. Failure of oversight by the board.
To pursue its ambitious expansion plan, the Bank brought in outside executives at different levels with no role clarity or required checks & balances in place. Successive CEOs and boards failed to exercise judgement in evaluating the performance of lateral entrants allowing some to become more powerful than the appointing authority.
The failure to take along existing employees and officers resulted in lack of trust between the management and employees on the one side, and the top management and the board on the other. Recurring IR conflicts led to greater distrust when dialogue was replaced by diktat, leading the unions going to the RBI to complain about what they considered was against the Bank’s interest.
The gravest issue related to a fixed deposit scam in the Mumbai branches in 2013 involving a director, who was later arrested by the economic offences wing (EOW) of the Mumbai police. DLB had an exposure of Rs141 crore with Rs800 crore exposure at the industry level. Instead of resolving the conflict through trust-based dialogue, vindictive action followed, culminating in the summary dismissal of PV Mohanan, general secretary of Dhanlaxmi Bank Officers’ Organisation, in 2015. Transparency and dialogue, which play a key role when transformation is attempted, were missing.
The problems got compounded because of the board failed to exercise effective oversight over top management. There were no means to know the functioning of different departments, particularly credit, recovery and human resources (HR). If the board had asserted this power there could have been timely interventions to arrest further downslide. Unfortunately, the MDs and chairmen—some of whom were veterans in the financial sector- took things for granted, giving unbridled power to management officials led by the CGM.
All these developments could not have escaped the radar of the RBI. In 2014, the national body of bank officers, All India Bank Officers’ Confederation (AIBOC), had, in a letter to RBI pointed out the continuing conflicts within the board and its subservience to the CEO and the CGM who was not a member of the board. RBI had its own nominees on the board; it could have verified the reports independently. When it reacted, it was slow and without further follow-up. Beyond putting the Bank under prompt corrective action protocol (PAC) in 2019, no other step was taken till September this year.
The disorder within the top management cost DLB heavily. It could not sustain the high growth attained during Mr Chaturvedi’s initial tenure; it moved into stagnation and decline. The figures for a 10-year span speak eloquently:
Dhanlaxmi Bank Ltd-Performance between 2011 and 2020
(Amount in Rs Crore)
There are two redeeming features in an otherwise depressing performance. Although DLB incurred net loss in between, it registered net profit during 2019 and 2020; and there was infusion of capital raising its capital to risk (Weighted) assets ratio (CRAR) to 14.41% during 2011 and 2020 from 10.81%. The RBI’s PCA could have possibly helped it to show better performance in these two parameters. That however, left the fundamental governance issues unaddressed.
(This is first part of a two-part series)
(TR Bhat is former president of All India Bank Officers' Confederation (AIBOC) and former officer of Corporation Bank)