ICICI Bank and Axis Bank: Cracks in India’s banking edifice
To say that India’s public sector banks have had a rough run in the past two years would be an understatement. A ballooning pile of bad loans, precarious capital positions and massive frauds are but only a slice of their problems. Little wonder that there has been a cacophony of voices clamouring for privatization of the state-run banks.
But in the past two weeks, an unprecedented set of events has turned that argument on its head. The developments have highlighted issues related to corporate governance at ICICI Bank Ltd, India’s second largest private bank, and performance issues at Axis Bank Ltd, the country’s third largest, exposing, as some say, the darker underbelly of the private banking business in India.
For Axis Bank’s managing director Shikha Sharma, matters came to a head when the banking regulator, Reserve Bank of India (RBI), asked the lender’s board to re-consider the decision to give Shikha Sharma a fourth term, citing concerns over rising NPAs under her watch.
Sharma has since sought an early termination of her fourth tenure that starts on 1 June. The request, which Axis Bank’s board has granted, will cut short her fourth three-year term by two-and-a-half years.
The allegations against Chanda Kochhar, managing director and chief executive officer (CEO) of ICICI Bank, are of a more serious nature.
These relate to the controversy surrounding loans made by ICICI Bank to the Videocon group, whose controlling shareholders have business links with Chanda Kochhar’s husband. Later, allegations also surfaced that Kochhar’s brother-in-law was involved in restructuring foreign currency debt given by this bank.
The ICICI Bank board headed by chairman M.K. Sharma has so far backed its CEO, expressing full faith and confidence in her and denying any quid pro quo, nepotism or conflict of interest in her dealings as head of the bank. The board also reviewed the bank’s internal processes for credit approval and found them robust. N. Vaghul, a former chairman of the group, has also backed Kochhar, although he has said an independent enquiry to clear her name could have been undertaken. That enquiry has so far not been announced.
“I am puzzled by the board’s reluctance to order an independent enquiry into the matter without the managing director’s presence. Perhaps, long tenure distorts the balance of power between outside directors and the management in favour of the management,” said R. Narayanaswamy, professor of finance and control at the Indian Institute of Management, Bangalore.
To compound Kochhar’s problems, federal agency Central Bureau of Investigation has started a preliminary enquiry into the alleged nexus between Videocon chairman Venugopal Dhoot and Kochhar’s husband, Deepak.
To be sure, some have alleged that the raising of the issue of the loan to Videocon group now points to a concerted campaign against Chanda Kochhar.
The issue was first brought to the board’s notice in 2016 and all the regulators had prior information about it, ICICI Bank chairman Sharma said.
“I don’t know if it is about diverting attention from other things such as Nirav Modi and Gitanjali Gems issues. All the regulators had this information in 2016. I do not see any reason for having a fresh look again and revive interest in the issue,” he said in an interview to Mint.
While the developments have rightly shone the light on the nation’s private banks, it has given some respite to the beleaguered state-run banks, at least from the daily headline cycle. The focus on Kochhar has relegated developments about the $2 billion fraud at Punjab National Bank and the alleged mastermind, fugitive billionaire Nirav Modi, off the front pages of newspapers for a while. Modi and his jeweller uncle, Mehul Choksi, the controlling shareholder of Gitanjali Gems Ltd, allegedly in collusion with bank officials, obtained buyer’s credit for cheaper foreign-currency loans, without posting any collateral. When the loans matured, they took out even bigger ones to pay them off, somewhat like a Ponzi scheme. Investigating agencies say Modi is in Hong Kong while Choksi is in the US. The nephew-uncle duo left the country before the fraud was uncovered.
The controversy surrounding Kochhar has already led to problems for the bank. The initial public offering (IPO) of ICICI Securities Ltd, the investment banking unit of the lender, received a poor response from investors in the wake of the corporate governance issues. The weak response forced the company to cut its IPO size to Rs3,500 crore from Rs4,017-crore.
Large shareholders of ICICI Bank are already seeking answers from the lender’s board about the alleged governance failures and the steps the lender is taking to address them. In the coming days, this will determine the fate of Kochhar. “We have had some meetings with the bank on concerns, whether there was any conflict of interest in granting these loans, whether the board was aware of these conflicts, and if they were, what (then) did the board do. We have also raised concerns on the possibility that the current CEO may step down. So far, the bank has assured us there was no conflict of interest and the CEO has the backing of the board,” a fund manager told Mint on condition of anonymity.
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Fitch Ratings said the current controversy poses a “reputational risk” for the bank, and it would take appropriate rating action if risks to the bank’s reputation and financial profile were to rise considerably.
“The presence of the bank’s CEO on this credit committee (which sanctioned the Videocon loan)—and the bank’s reluctance to support an independent probe—have, in our opinion, created doubts over the strength of its corporate governance practices,” Fitch said.