A Bank CEO’s Appointment, Reappointment, And Much More...

On March 7, IndusInd Bank Ltd informed the stock exchanges that the Reserve Bank of India (RBI) had approved the reappointment of its managing director (MD) & chief executive officer (CEO) Sumant Katpalia for a year until March 23, 2026. Katpalia’s current term ends on March 24.

If you were walking on the Mint Road in Mumbai on that day, you could have heard the Shah Rukh Khan dialogue from the Hindi film?Om Shanti Om?reverberating in the corridors of the RBI headquarters: “Picture?abhi baaki hai, mere dost”.

Here’s what happened next.

After market hours last Monday, the bank informed the stock exchanges that it noticed “some discrepancies” in accounting of derivatives. A “detailed internal review” carried out by the bank estimated around 2.35 per cent impact on its net worth as of December 2024. In other words, it would need to provide around ~1,600 crore for this. IndusInd Bank has appointed a reputed external agency to independently review and validate the internal findings. Once its findings are out, the actual impact on the balance sheet will be known.

The board meeting to discuss this, among other things, commenced at 4.12 pm; by 6.25 pm the discussion got over and the stock exchanges were informed even as the board meeting continued, with other agenda items on table.

On that day, IndusInd Bank share lost 3.86 per cent. The next day, the share price crashed 27.6 per cent, the sharpest fall in its history, wiping out ~18,000 crore market capitalisation.

Over the weekend, the RBI issued? a release, saying,?the bank is well-capitalised and its financial position remains satisfactory. It has directed its board and the management to have the remedial action completed fully during the current quarter. There is no need for depositors to react to the speculative reports at this juncture. The bank’s financial health remains stable and is being monitored closely by the RBI.

Incidentally, the bank had asked for a three-year term extension for Katpalia, armed with the board approval in September last year.

This is not the first time that the RBI has approved a new tenure for Katpalia that is shorter than what the bank’s board has approved. On an earlier occasion, the banking regulator had approved a two-year term against the board’s approval for three years.

The RBI declining to give a three-year extension to a private bank boss is not new, but what happened in this case – first cutting a three-year term to two and then reducing it further to one – hasn’t probably happened in the past.

The reverse of this has happened. Federal Bank Ltd’s former MD and CEO Shyam Srinivasan had twice got a one-year term each when the board asked for three years but the RBI followed it up with a term of three years, in sync with what the bank's board had asked for.

Indeed, the contexts are very different, but let’s try to understand the logic behind such moves. We can presume that in Federal Bank’s case, the regulator was not happy with certain things when it approved a two-year term but later things turned for the better and it did clear a three-year term for Srinivasan, as recommended by the board.

In the case of IndusInd Bank too, cutting the tenure to two years was a warning to the CEO but things didn’t improve and hence the RBI cut it even shorter the next time.?

But if the RBI was aware of what’s happening at the bank, why didn't it say “good bye” to Katpalia? Could that have created disruptions in the market? In that case, the regulator could have convinced the board not to seek an extension of the incumbent CEO in the first place. Granting one-year term and what followed next have created more disruptions than what probably the regulator had anticipated.

Had the board not sought Katpalia’s extension and instead looked for his successor, the transition would have been different.

Shortly after the board meeting on Monday, at a conference call with analysts, a candid Katpalia said that the banking regulator might have concerns about his leadership skills in running the bank, which was why it had not approved a three-year term for him, as recommended by the board.

Incidentally, the bank’s chief financial officer, Gobind Jain, resigned on January 17 “to pursue other professional opportunities”.

Let’s look at some other appointments and reappointments of bank CEOs in the recent past. In 2021, the RBI had extended RBL Bank Ltd chief Vishwavir Ahuja’s tenure for one year, against the three years sought by the lender’s board. Before that, In August 2018, Yes Bank Ltd received the RBI approval for the continuance of Rana Kapoor at the helm till further notice, even though the bank’s board as well as its shareholders had approved Kapoor’s reappointment for three years. Kapoor was allowed to occupy the corner room till January 31, 2019.

Axis Bank Ltd’s former MD and CEO Shikha Sharma was denied extension by the RBI. The bank's board had proposed a three-year term for her till May 2021, but the RBI had asked the board to reconsider the fourth three-year term it was seeking for Sharma. Finally, her fourth term as CEO and MD of the bank lasted just seven months till December 2018, following her request to be relieved of the responsibility. In July 2017, Axis Bank had approved her reappointment for three years.

The story of Chanda Kochhar of ICICI Bank Ltd is different from others. On June 19, 2018, she went on leave and Sandeep Bakhshi took over as the bank’s chief operating officer. Three and a half months later, in October, Kochhar resigned and Bakhshi moved into the corner room.

Unlike in India, where the Banking Regulation Act dictates that the RBI needs to clear both the appointment and reappointment of bank CEOs, in most developed markets, regulators typically clear the appointment of the CEO of banks but don’t play a role in their reappointment; this is done by the board.

JPMorgan Chase & Co has been fined $348.2 million by US bank regulators over its inadequate programme to monitor firm and client trading activities for market misconduct between 2014 and 2023, but Jamie Dimon continues to be the chairman of the board and CEO, one of the longest-serving big-bank bosses globally.

The Senate Banking Committee’s indictment of Wells Fargo CEO John Stumpf is well known. Stumpf was “deeply sorry” for the more than two million unauthorised accounts his staff opened for the bank’s customers to meet Wells Fargo’s sales quotas which had led to a $180 million penalty.

It’s time for the RBI to revisit the process of clearing the appointment of a bank CEO as well as the extension of their tenure. The board plays a critical role in running a bank but the buck stops at the MD and CEO. Section 10B of the Banking Regulation Act makes it abundantly clear that the management of the affairs of a private bank is “entrusted” to an MD, who exercises their powers, “subject to the superintendence, control and direction or the board of directors”.

Typically, the RBI does not look at the second person on the list of probable CEO candidates, recommended by the board, unless the first person does not meet the so-called “fit and proper” criterion. In other words, the regulator doesn’t look into the competence of the candidates; it leaves it to the board and the search committee.

Of course, there have been instances where the RBI has not approved the name/s proposed by the bank for the top position. One such recent case is that of Tamilnad Mercantile Bank Ltd. In this case, the RBI rejected the names of all candidates. “…the candidates proposed by the bank for the appointment of MD & CEO were not found suitable,” the lender informed the exchanges in April 2024. The regulator asked the old-generation private-sector lender to submit a “fresh panel of candidates with suitable experience”.

Such instances don’t show the board of a bank in good light. Let’s keep that story for another Monday.

This column first appeared in Business Standard.’

The writer, a Consulting Editor of Business Standard, is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book:?Roller Coaster: An Affair with Banking.

To read his previous columns, please log on to?www.bankerstrust.in

X: @TamalBandyo

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