Latest controversies turn the screw on Indian banking

Chanda Kochhar is under the scanner for a ₹3,250 crore loan extended by ICICI Bank to the Videocon group of companies
Image: Vikas Khot
 
Bankers in India could possibly never have it worse. After years of witnessing lending decisions go awry, clients’ stretched balance sheets and higher provisioning for bad loans, events in recent weeks have become visibly ugly and strained for some.

For years, public sector banks faced the wrath of market conditions and regulators, leading to the current tipping point where privatisation and mergers of state-owned banks are being weighed. Till now, the disarray in the Indian banking sector was, at best, seen as a fallout of a larger economic slowdown; or, at worst, a case of mismanagement. There weren’t personal allegations raised against bank chieftains.

But now, the ongoing crisis has not only found its way to the doors of private lenders ICICI Bank and Axis Bank, but there are also accusations of impropriety and lapses in corporate governance.

In the case of ICICI Bank, MD & CEO Chanda Kochhar is under the scanner for a ₹3,250 crore loan extended by the bank to the Videocon Group in 2012.

Earlier, Kochhar’s husband Deepak Kochhar had started a joint venture, NuPower Renewables, with Venugopal Dhoot. The Videocon promoter allegedly loaned Kochhar ₹64 crore through his company Supreme Energy and then transferred its ownership to Deepak Kochhar for ₹9 lakh. ICICI’s Videocon loan, in 2017, turned into a non-performing asset (NPA).

The matter was brought to light by investor Arvind Gupta in a blog post in March 2016 and was recently widely reported by the media. Kochhar has denied any wrongdoing and the bank has said, in a press statement on March 28, that while Chanda Kochhar was part of the credit committee meeting which evaluated the Videocon loan in 2012, “there was no question of any quid pro quo/nepotism/conflict of interest” and reposed full faith in her leadership. The CBI is investigating the loan transaction to understand if there was any wrongdoing.

In the case of Axis Bank, MD and CEO Shikha Sharma’s leadership has come under scrutiny after a series of weaker-than-expected earnings growth, ballooning provisioning for bad loans in recent quarters and earnings data leaks (see box).

In a sudden development, Sharma has requested the Bank's board to extend her term only for a period of six months ending December 31, 2018 instead of the earlier proposed three years. 

The board has accepted her said request, subject to the approval of the RBI.

While the debate is open on whether Kochhar and Sharma—lauded by the industry for their leadership skills in previous years—have done any wrong, the investor community has not taken to this kindly. The ICICI Bank stock has fallen by 12.3 percent to ₹268.45 as on April 4 on the Bombay Stock Exchange (BSE) from ₹306.35 on March 14, whereas Axis Bank’s has slid by 9.18 percent in the same period.

In a similar vein, on April 4, ICICI Securities, India’s largest broking arm, made a weak market debut on BSE. The stock opened 13.65 percent below its issue price of ₹520. The company had been forced to scale down the size of its IPO to ₹3,500 crore from an initial ₹4,016 crore.

Market experts and former bankers Forbes India spoke to seem to disagree on what these private bankers should do, or have done, to support corporate governance. They believe Kochhar should have been more transparent and forthcoming in her disclosures to the bank. Some suggest she should step down from her post and allow for an independent investigation to take place. Bankers, however, have faith that ICICI Bank will come out of this mess, unscathed.

Bank Stable, Don’t Panic
“The two issues [sanctioning the Videocon loan and a wrongful gain for the Kochhars] are separate. This was not a fresh loan and it is not that ICICI Bank has increased its exposure to Videocon, in recent years. In fact this has come down,” says a former ICICI Bank chief, who has been a common mentor to Kochhar and Sharma in previous decades, on condition of anonymity.

Calling Kochhar’s leadership “decent”, he says both ICICI Bank and Axis Bank were born from a legacy of being corporate banks and not retail banks. When asked whether Kochhar was guilty of any financial impropriety, he says: “She had always disclosed information about her husband. To ask details of all investors or borrowings of a particular company [NuPower Renewables, in this case] is asking for too much. The corporate world will go crazy. We need to draw a red line on what defines corporate governance.”

[bq]ICICI Bank has defended Chanda Kochhar even as the CBI is examining if there was any wrongdoing[/bq]
But investors don’t seem convinced. “For someone of her calibre, Kochhar should have dealt with it differently. If she had just stayed away from the credit committee meeting and the bank had agreed to this move, she would have come out clean,” says the CEO of an institutional investment fund house.

An analyst with a foreign equity research house, declining to be named, says: “As things came out in the open, she should have stepped down calling for [CBI] investigations to continue… this would allow for an independent inquiry and she could have always come back.”

The timing of such news flows cannot be ignored. ICICI Bank will, like Axis Bank, be in the spotlight. The Narendra Modi-led government is eager to tackle corruption and may be in a mood to show that it can take punitive action against bankers, considering that it has been unsuccessful so far in arresting defaulters such as diamantaire Nirav Modi or liquor baron Vijay Mallya.