Money & Banking

Private banks may have to review succession plans

Surabhi Mumbai | Updated on April 26, 2021

Kotak Mahindra Bank to be impacted but not immediately

A number of private sector lenders will have to review their succession plans in the coming years, with the Reserve Bank of India on Monday issuing guidelines for tenures of Managing Directors and CEOs.

Immediate impact

While private sector lender Kotak Mahindra Bank is most likely to be impacted, analysts say the impact on banks would not be immediate as the current incumbents would be allowed to complete his current term.

“Banks like Kotak, DCB, City Union Bank, Federal and RBL Bank have long running tenures of the current MDs. However, some of these like Kotak and City Union where the extension has already been done till 2024 for the former and 2026 for the latter should not have major near term impact. The upper limit of 15 years for MD and CEOs may increase the scope for a few more years at the helm for banks like DCB, Federal and RBL. As such, succession planning is an ongoing process for private banks,” said Siji Philip. Senior Research Analyst, Axis Securities.

In the case of Kotak Mahindra Bank, Uday Kotak got re-appointed as MD and CEO on January 1for three years till January 2024.

“We don’t expect any major term impact on Kotak Mahindra Bank as his term will last another three years. Further, Uday Kotak has a stake in the bank, and is expected to continue having involvement in the bank even after he steps down as the MD in 2024,” Philip said.

The RBI has notified norms for corporate governance in banks, under which it capped the post of the MD and CEO or Wholetime Director at 15 years. The individual will be eligible for re-appointment as MD and CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years.

The MD and CEO or WTD, who is also a promoter or major shareholder, cannot hold these posts for more than 12 years, which can be extended by three years depending on the RBI.

Many experts said the impact of the norms had already been factored in by the market, but said they were uncertain of its efficacy.

“Though the recent turbulence is the understandable trigger, new age private banks need promoter-leaders who are youthful sprinters with a marathon appetite. Tenure caps applicable for ownerless enterprises may not be the solution for owner-led enterprises. Leadership policy requires replicating best practices and not just showcasing,” said a policy outsider.

“The guidelines are in line with the discussion paper and markets have had time to prepare for it. In terms of norms for committee composition, the RBI had tried to align it with the Companies’ Act. However, on the issue of the tenure of the CEO and Managing Director, the RBI has not made a durable case on its approach. Our view has been that the RBI should exercise discretion rather than one size fits all,” said Amit Tandon, founder and Managing Director of corporate governance and proxy advisory services, IiAS.

Corporate governance

The RBI had, in June 2020, issued a discussion paper on corporate governance in commercial banks. The proposed reforms had come at a time when lenders such as YES Bank and Punjab and Maharashtra Cooperative Bank were witnessing a management crisis.

The RBI instructions would be applicable to all private sector banks, including small finance banks and wholly-owned subsidiaries of foreign banks. The instructions on upper age limit for MD and CEO and WTDs in private sector banks will continue, and no person can continue as MD and CEO or WTD beyond the age of 70 years.

Srinath Sridharan, an independent markets commentator, said: “The new corporate governance guidelines for banks sets a higher benchmark for private banks & foreign banks in India, with the theme of “higher number of and deeper-involvement of Independent Directors (IDs) & Non-Executive Directors (NEDs), at the board governance.

“With ACB & NRC to be constituted with only NEDs, and half of board meeting attendees to be IDs, this might mean creating additional IDs capacity across some of the banks. With banks generally having a wide range of board committees, I anticipate demand for additional independent-director candidates with understanding and expertise across audit, HR, law, technology and digital, management assurance, new age economy, credit-access-for-Bharat, millennials.

“The new rule of tenure cap for CEO / WTDs (either promoter or not) would be interesting to note from perspective of younger individuals who are associated with the banks. Mathematically looking at this rule in conjunction with 70 years being the max age limit for such roles, anyone lesser than 55 years of age and getting into these roles would have a long runway.

“With the RBI allowing the respective bank boards to use their discretion, to prescribe a lower retirement age for the WTDs (including the MD and CEO), it would be worthwhile watching how many boards actually do so over next few years.”

Published on April 26, 2021

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