Saturday, December 05, 2020

RBI action against HDFC Bank

 The RBI has come down heavily on HDFC Bank for disruptions in its online payment services. It has barred the bank from expanding its credit card  and digital business until the IT issues are satisfactorily addressed. 

RBI Governor Das took the unusual step of explaining the rationale for the central bank's move. He said, "You see, you cannot put thousands or lakhs of customers who are using digital banking into any kind of difficulty for hours together... It is important that the public confidence in digital banking is maintained".

It is indeed significant that the regulator has asked the board of HDFC Bank to fix accountability for the lapses on the IT front.  This is something one would expect of any board but we know this seldom happens.

The RBI's action against the leading private bank in the country is quite remarkable. In the past, there was a feeling that the regulator was treating the new private banks with kid gloves. Typically, monetary penalties of a few million rupees were levied, which were nothing but a rap on the knuckles. It was during the tenure of Governor Urjit Patel that fines were ramped up significantly and neither private nor foreign banks were spared. The RBI did not go along with the decision of the board of Axis Bank to extend the tenure of its then CEO. 

Under Das, the RBI has gone further. The CEO of Yes Bank was asked to stepped down and then the board was superseded. At HDFC Bank, the appointment of two executives to the board just months before the end of the tenure of CEO Aditya Puri was rejected. Bandhan Bank was penalised for not complying with the requirement to reduce promoter's shareholding below 40 per cent. And there was the tussle with Kotak Bank over reduction in the promoter's stake. 

It was the RBI's discussion paper on corporate governance in banks released a few months ago that stood out. The report is ownership-neutral in its approach to governance. It highlights the fact that the functioning of key officers- the Chief Risk Office, the Chief Compliance Office, the Head of Internal Audit and the Chief Vigilance Officer- is unsatisfactory and this is because of the manner in which they are appointed and appraised and whom they report. The paper proposes a radical overhaul in corporate governance at banks, irrespective of ownership.

This was refreshingly different from the approach of the P J Nayak committee (2014) which gave the impression that governance issues were predominant at public sector banks and that these banks needed to adopt the ownership structure and other practices at private banks.

Private banks do better not because of superior governance, meaning the functioning of boards and compliance with regulations, but for a variety of other reasons: a clear focus on making profit, the absence of government mandates to pursue particular objectives such as financial inclusion, superior incentives for top management and, well, sharp business practices that public sector banks cannot emulate. The RBI's actions show a welcome recognition of the shortcomings in governance at private banks. 

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