Why Chanda Kochhar needs to step down, according to an IIM-A professor

Two of India’s most celebrated woman bankers have been in hot water for the last three months.

Shikha Sharma, CEO of Axis Bank, the country’s third-largest private lender, stepped down reportedly following a strong signal from the Reserve Bank of India (RBI) that it was unhappy over rising bad loans and falling profits. The firm also faces other regulatory challenges. Meanwhile, in March, allegations of nepotism and favouritism over a loan disbursement of Rs3,250 crore ($481.6 million) surfaced against Chanda Kochhar, managing director and CEO of ICICI Bank. Indian investigative agencies and regulators are looking into the allegations.

These problems stem from the inefficiency of these banks’ boards, which have relatively less at stake, believes T T Ram Mohan, professor of finance and accounting at the Indian Institute of Management Ahmedabad, the country’s top business school. Mohan feels Kochhar, too, must step down till the probe is concluded and that the ongoing boardroom drama is unnecessary.

Edited excerpts from an interview:

India’s private banks, which had been relatively better placed, are now plagued by corporate governance issues. Do you think they are losing their halo?

The reputations of ICICI Bank and Axis Bank have taken a knock in recent months. At Axis Bank, the issue was the board giving Sharma a fourth term despite what was perceived by analysts in general as unsatisfactory performance. When the RBI questioned the decision, the board wasn’t able or willing to defend its decision. At ICICI Bank, the issue is a conflict of interest involving the CEO and apparent non-recusal from matters involving certain parties. However, one must be careful not to generalise across private banks. Axis Bank and ICICI Bank are board-managed and professionally run banks.

Private banks that have a dominant promoter with a substantial equity stake, such as HDFC Bank or Kotak Mahindra Bank, are doing better. The promoters have skin in the game which is a different situation from banks run by professionals with little or no equity stakes. The culture of board-managed companies being answerable to institutional investors is yet to mature in India.

There are very few companies in India—L&T and Infosys are a couple of names that readily come to mind—that fall in the category of professionally managed and board-run, unlike in the West where that is the dominant model. ICICI Bank and Axis Bank have shown the inadequacy of the board-managed model in Indian context.

In the case of ICICI Bank, what is it that the board should have done?

The board should have ascertained whether Kochhar had made the necessary disclosure about conflict of interest and recused herself from matters that involved such a conflict. If she had not done so, the board should have asked her to step down. The whole issue is being made to be very complex and there are reports that the board is going to appoint a committee headed by an outsider to probe the issue. This is not some bureaucratic or government-related situation where a judicial inquiry is called for. The issue is one of alleged impropriety involving the CEO. The board has the power and the competence to do what is required. There is disappointment that it has failed to do what was required.

Do you think Kochhar should step down as CEO while she is being probed?

Yes, she must.

Why are international ethical and governance practices such as the CEO of scandal-hit bank stepping down not followed in India?

It’s a sorry comment on the functioning of our boards of directors and also on the accountability enforced by institutional investors and regulators.

The pile of bad loans is increasing, yet, every quarter, banks have been claiming that the worst is over. How does one trust them any more?

At an NPA (non-performing asset) level of around 14% of assets at public sector banks, the bad loan level is pretty high. However, slippages cannot be predicted accurately. There have been unexpected economic conditions that caused slippages to increase, such as demonetisation and its adverse impact on the economy and dumping by China. Regulatory changes like stricter norms for recognition and provisioning and the new resolution framework proposed by RBI have also upset forecasts. In other words, in the last three years there have been several changes in the external environment as well as the regulatory environment that have made prediction of slippages rather difficult. But from here on, one can expect less divergences between the guidance given by management and actual slippages as most of the bad news seems to have got factored in.