The Banker Who Crushed His Diamonds by Furquan Moharkan (read novel full txt) 📕

Kotak is a prudent and conservative banker, which is contrary to Rana Kapoor’s flamboyant way of functioning. Kotak Mahindra Bank, under his leadership, has grown to be one of the top five lenders in India. The numbers and balance sheet of Kotak Mahindra Bank (on 31 March 2020) say that it is one of the safest banks in the current ecosystem: Net NPAs at 0.71 per cent, capital adequacy ratio at a healthy 17.9 per cent, provision coverage ratio of 69 per cent and a strong CASA ratio of 56.2 per cent.

What is more, on the face of it, the bank doesn’t have much of risky exposure: total special mention accounts (SMA)-2—ones with a repayment delay of between 61 and 90 days—for the bank are only worth Rs 96 crore (0.04 per cent of net advances). That is probably why, immediately after the RBI’s proposal, all adviseries — Indian and foreign — were critical of the central bank.

‘Uday Kotak has run the bank in an exemplary way. He could have been the CEO for another nine years (till he would have turned seventy), but his tenure could be cut short to less than three years with effect from today assuming RBI’s draft guidelines become final with no changes and April 2021 is the date when these guidelines would be applicable,’ international investment bank Macquarie said in a note.

The proposal also says that non-promoter CEOs can stay for a tenure of fifteen years. In such a scenario, Aditya Puri of HDFC Bank has been at the helm of affairs for over twenty-five years now, and the succession was all set to take place when Puri retired in October 2020. While there have been many operational decisions for which HDFC Bank can be criticized, Puri, on the face of it, seems to have left behind a healthy bank. Other than HDFC Bank, the CEOs of RBL Bank and Federal Bank have also served tenures of about ten years already. They will have at least another five years before having to make a transition.

This can be seen as a move to prevent bank chiefs from consolidating power at the top. But there needs a subjective evaluation. Chanda Kochhar was only nine years at the helm of ICICI Bank when she had to step down due to alleged malpractices in lending. It is alleged that she started taking kickbacks within three years of becoming the CEO. So, will curbing the tenure of executives prevent the consolidation of power? It’s difficult to give an objective assessment. What the RBI needs to do is to increase the governance standards for the boards of the banks. In the case of YES Bank, the erstwhile board—including independent directors and the celebrated RBI nominee director—failed the expectations of the investors every time they announced that the fundraising plan was on course.

Inviting discussions on improving governance at banks is definitely good, but this entire discussion paper smells of a hit job. The central bank was targeting only one bank (Kotak), which has less than 2 per cent market share of the banking industry, while problems have been in the balance 98 per cent. In fact, the entire non-promoter-run private banks, PSU banks and financial institutions are in a mess! In many of these banks and institutions, the RBI was sitting on the board.

However, despite the RBI tightening the noose on promoters of the banks, the bigger question to ask is who controls Indian banks. ‘Many questions need to be asked. In the case of KMB, they know who owns it. Can RBI and the Government of India say the same for any other new-generation private bank? Is the ownership even Indian? You will be very surprised!’ said ex-J&K Bank chairman and MD Haseeb A Drabu. And he has a valid point.

At a time when the RBI is trying to enforce governance standards in banks and the government is trying to check the hostile takeover of Indian companies by foreign nationals, there is a worrying trend concerning in the ownership of Indian banks: 622.66 crore shares across eighteen private banks are owned by undisclosed foreign investors.

The total valuation, as on 12 June, for Indian banks stood at Rs 12.87 lakh crore, of which one-fourth (Rs 3.03 lakh crore) was owned by undisclosed foreign portfolio investors (see Figure 5). The undisclosed FPI shareholding is highest in Axis Bank, at 35.46 per cent, followed by ICICI Bank at 33.92 per cent and HDFC Bank at 31 per cent (see Figure 4). As the ultimate beneficiaries of these holdings are unknown, it can be also presumed that this undisclosed shareholding may be used as a front towards laundering money.

And we remember how these FPIs, voting as a block, tried to remove Deepak Parekh from HDFC Ltd. Also, we also remember how Rana Kapoor tried to control these FPIs through a stake in proxy advisory service. These are basically the foreign portfolio shareholders who have less than 1 per cent stake in these banks. While for SEBI and the RBI this might be a small number, but they can vote on consolidated basis and hold sway over the decisions in the banks. This also raises questions about our national economic security.

Figure 4:

Source: Company filings, data as on 17 June 2020

Figure 5:

Source: Company filings, data as on 17 June 2020

So, what else can the RBI do to stabilize the banks? One good option is to control the lending limits. As we saw in the case of YES Bank, the credit growth was way higher than the industry-level credit growth. A closer scrutiny by the RBI might actually help with this. ‘I cannot give an off-the-cuff answer. There are many suggestions on the table. Some of them, at least, must be acted upon and implemented. There must be thresholds which, if crossed, the bank concerned must be obliged to pause its lending until a quick and thorough review is completed by the RBI,’ former finance minister P. Chidambaram told