On Monday, Axis Bank announced in a stock exchange filing that the CEO of the bank, Shikha Sharma, who had been re-appointed for a fourth term, would leave by end December this year, well ahead of her proposed tenure until May 2021. The bank’s decision comes against the backdrop of the Reserve Bank of India’s concerns on approving a fresh term for the incumbent. Though the RBI hasn’t made public its reasons for doing so, reports suggest it had to do with bank’s mounting bad loans over the last few quarters. If that is indeed true, the early exit of the Axis Bank CEO would mean pinning of accountability on grounds of performance. Ironically, this comes at a time when questions are being raised by institutional investors on the issue of a conflict of interest or quid pro quo regarding ICICI Bank sanctioning a Rs 3,250-crore loan to the Videocon group in April 2012 and a transaction involving a trust controlled by Deepak Kochhar, the bank CEO Chanda Kochhar’s husband, prior to that. The board of ICICI Bank has backed the CEO, claiming there was no conflict of interest though she was a member of the credit committee that approved the Videocon loan.
Credit rating agency Fitch has now raised a red flag on the bank’s corporate governance: It has promised appropriate rating action if risks to the bank’s reputation and financial profile were to rise considerably. Fitch has warned that the CBI probe, which is underway, could undermine investor confidence in the bank, which has potential implications for funding costs and liquidity in an extreme scenario. The fact is the cloud over the potential conflict of interest of the CEO has already hurt the bank in terms of value erosion. The longer the issue festers, and with it a gradual loss of faith or trust, especially in the absence of the bank’s board providing greater clarity including on whether adequate disclosures had been made on the relationships of a corporate nature and that there were no breach of regulations or rules, greater the challenge for India’s largest private bank, including for raising capital.
While it has given a clean chit to Chanda Kochhar, the ICICI Bank board has not clarified on the broader issue — whether it has made a distinction between the interests of the shareholders and those of the management. A misalignment of such interests can dent the long-term prospects of the bank. The longer the board fails to address these issues, the more the CEO’s position will become untenable. What is troubling and disappointing in the case of both banks — Axis and ICICI — is that they were promoted by institutions without the baggage of external constraints being imposed on them, like in the case of state-run banks. Better board oversight and greater governance standards were expected of them.