Editorial

Miles to go

| Updated on October 08, 2018 Published on October 08, 2018

The Chanda Kochhar episode has highlighted glaring lapses in the functioning of bank boards

By accepting Chanda Kochhar’s request of an early retirement, the board of directors of ICICI Bank may have ended the uncertainty over leadership at India’s second largest private bank. But neither Kochhar, the board nor the bank’s many independent directors have come out of this entire saga smelling of roses. On Kochhar’s part, the ‘graceful exit’ has come a little too late in the day to mend the damage done to her reputation. The allegations against her included not disclosing conflict of interest caused by certain transactions between certain borrowers of the bank (Videocon group) and entities controlled by her spouse. Propriety demanded that she disclosed the conflict of interest to the board and recused herself from the loan committee at the outset. But by not stepping down when the controversy broke out and even when the board ordered an independent committee headed by BN Srikrishna to probe the matter, she only stoked concerns over corporate governance standards at the bank. The board, instead of offering abstruse statements and coming to her defence, should have upheld high standards of governance and asked her to step down long ago.

The episode — along with the recent IL&FS crisis and the turmoil at private sector banks such as YES Bank and Axis Bank — shows bank boards in poor light. Ever since the bad loan crisis unfolded, it has been PSBs that have been accused of crony capitalism and weak governance. But as has been evident over the past one to two years, the books of many private sector banks too have been overstated. For ICICI Bank, its profits have shrunk by a third over the past five years, while for Axis Bank, its earnings are less than a tenth of what they were five years ago; bad loans for these banks have grown 5-10 fold in the past five years.

The growing concerns around corporate governance at banks in particular and systemically important financial entities like IL&FS in general, call for greater examination of the role of directors. SEBI accepted about 40 of the 80 recommendations, set out in the Uday Kotak Committee on corporate governance, in March this year. Some of them — Chairperson-CEO separation, capping maximum number of directorships, setting minimum number of directors for the top 1,000 and 2,000 entities, new disclosure requirements on auditor resignations, related party deals and consolidated quarterly results, etc — will help. But implementation in spirit and not letter is the key. The banking system’s crisis of the ‘missing middle’, with not enough talent for critical positions, needs to be addressed, not just at PSU banks but private sector lenders as well. If a shorter tenure of bank chiefs at PSBs prompted them to kick the can down the road, a much longer tenure of officials at private sector banks could also be equally damaging. Re-examining the manner in which these critical positions are filled is essential to prevent a repeat of ICICI Bank-like episodes.

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Published on October 08, 2018
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