Which Bank Next On The RBI Radar?

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At the post-monetary policy press conference on Friday, Reserve Bank of India (RBI) Governor Shaktikanta Das reiterated the central bank’s commitment to do “whatever is necessary” for financial sector stability. The recent rehabilitation of Yes Bank Ltd and Lakshmi Vilas Bank Ltd is a testimony to this commitment.

Das also spoke about the central bank’s focus on strengthening regulations and deepening its supervision, while Deputy Governor M K Jain outlined the “unprecedented” steps taken in the past few years to make RBI’s inspection and supervision stronger.

Is it time to take a close look at the 93-year-old Thrissur-headquartered Dhanlaxmi Bank Ltd? The tiniest bank carrying a loan book of Rs6,720 crore and a deposit portfolio of Rs11,436 crore believes in innovation, great customer service and has been growing from “strength to strength”. So, why should the RBI bother about it? It’s elementary, my dear reader – corporate governance.

Dhanlaxmi Bank had posted a Rs266.61 crore loss in March 2015, and followed it up with a loss of Rs22.71 crore in June and a profit of only 0.45 crore in September, when the RBI had thrown its Prompt Corrective Action (PCA) net around it, which prevents a bank from giving fresh loans. In the next two quarters, the loss swelled by another Rs187 crore even as gross bad loans inched towards the 10 per cent mark.

Dhanlaxmi Bank got out of PCA in February 2019 after it raised capital, brought down bad loans and its management committed to improve the overall performance on business parameters, including cost-to-income ratio and net interest margin. The RBI barred it from adding to its pool of employees and made quarterly performance review mandatory. Its board was to monitor the progress.

The board can do that if the banks’ shareholders allow it! Tired and sick of chairman Sanjeev Krishnan’s care for governance and efforts to improve recovery of bad loans and scrutinise dicey credit proposals, over a dozen shareholders called for an extraordinary general meeting (EGM) in June 2020 to remove him. The special notice served by these shareholders for the EGM had an identical text – “he (Krishnan) could not uphold ethical standards of integrity and probity” as an independent director.

Krishnan preferred resignation to being ousted. Along with him, two other independent directors — experts in credit, risk management and IT solutions – put in their papers. They had been brought in by Krishnan who had said no to the induction of two other directors, chosen by a shareholder who could not continue on the board.

Krishnan also objected to the presence of a retired (and reinstated) chief general manager (CGM) at every board meeting, trying to influence the loan proposals. After he quit, and the two independent directors followed suit, two persons of the shareholder’s choice walked into the board.

I wish the story ended here but it didn’t. The next target of the shareholders was the bank’s MD and CEO Sunil Gurbaxani who took over the assignment on February 27, 2020 for three years.

The root of the conflict was not new. Like the chairman, the CEO, too, was not comfortable with the interference of the shareholders, directly or indirectly, through a few independent directors and one particular senior employee – the CGM. Their influence has been all pervasive – ranging from credit decisions to recovery and HR.

Gurbaxani’s appointment did not pass through the bank’s annual general meeting (AGM) on 30 September. Over 90 per cent votes were against his appointment, which had been cleared by the banking regulator a few months back!

Media reports suggest that Gurbaxani was asked to quit on September 7 itself. “As early as September 7, I was asked to quit on my own or I would be voted out by shareholders at the September 30 AGM. I didn’t quit under pressure and hence was voted out,” Gurbaxani told IANS.

On that day, the board set up a three-member committee of directors to run the bank. One would love to know on what basis they were selected.

Incidentally, RBI has two nominee directors on the board — one of them was inducted just a day before the AGM.

How rotten is the situation at Dhanlaxmi Bank? A September 17 letter of the RBI which expressed “serious concerns on deteriorating governance standards in the bank” says all.

“…While we note that the bank has improved in certain financial parameters, it is of great concern that the governance standard in the bank has been on steady decline in the recent past. …In the month of June 2020, there has been an unexpected exit of a number of directors of the board, including the part time chairman… In the last three years, nine such directors/MD levels exists have happened before completion of their tenure… The conduct of the board meetings and deliberations were also not up to the standard”.

Referring to the presence of the CGM at all board meetings without any invitation, the RBI letter asks the board to “stop this unhealthy practice immediately” and says, failure to take remedial action will constrain RBI to take appropriate supervisory actions, including placing business restrictions on the bank.

The CGM concerned was removed immediately but should a listed bank be run in this manner? Can placing it under PCA again solve the problem? If the shareholders can throw the chairman and MD out, where is the sanctity of the RBI approval for such appointments? Is there any guarantee that the next chairman and MD would not be subjected to the same treatment by the shareholders if they don’t toe their line?

Incidentally, in 2016, former chief secretary of Kerala government, K Jayakumar, while quitting the board of the bank as an independent director, mentioned the same CGM and the “feudal mindset of the top management”. “They seem to presume that the directors have to be necessarily ‘yes men’. Any note different from ‘his master’s voice’ is unacceptable. ‘Dissent with dignity’ seems to be unknown in their lexicon,” he had written.

The list of investors in Dhanlaxmi Bank include B Ravindran Pillai, founder and managing director of RP Group of companies in Bahrain (9.99 per cent); C K Gopinathan, who runs different businesses in Koottanad and Palakkad in Kerala (7.49 per cent); Y M Veettil Abdul Kader, chairman and managing director of Lulu Group International (4.99 per cent) and Kapilkumar Wadhawan (4.99 per cent).

Let’s wait and watch. The RBI knows its job.

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