On 25 September the shareholders of old, private sector lender Lakshmi Vilas Bank stepped up and delivered the unexpected. A little over 60 per cent of them rejected the managing director and CEO appointed by a committee of three independent directors. The directors, in turn, were appointed by the central bank after the regulator found its financial position to be weak.
The 94-year-old Lakshmi Vilas Bank (LVB) has been under prompt corrective action for almost a year. With a capital adequacy ratio of 1.12 per cent, the bank has incurred losses for 10 straight quarters and has been scrambling to find a buyer.
A few days later on 30 September, the shareholders of another private sector lender, the 93-year-old Dhanlaxmi Bank voted by an overwhelming 90 plus per cent to reject the appointment of the managing director and CEO, who was selected by a similar process set by the central bank. This, less than a week after, the All India Bank Employees Association (AIBEA) asked the RBI to intervene in the bank before it ran into problems.
India's old private sector banks are a relic from the past. At least two of them – RBL and CSB – have more recently transitioned into newer entities with the infusion of fresh capital and talent.
There are rumours that the new CEO at Dhanlaxmi Bank was tailoring a merger of the bank that would cause it to lose its south based identity, which led to his ouster. Though, the CEO has denied such intentions. The RBI has since asked the committee of independent directors to recommend a new CEO.
Both of the recent cases bring to the fore the delicate balance between protecting the interests of investors and depositors in the case of banks. There is a view that the RBI seems to be micro-managing Dhanlaxmi Bank by directing it to remove a former chief general manager appointed as an adviser. The RBI, like its global counterparts, is concerned more about depositor rather than investor interest.
But the RBI has far too much power over the appointment of managing directors (and directors) of private sector banks. This ranges from choosing the managing director from a panel of three that the board is required to send to the RBI for approval. Even if the banks have proved their stellar performance over the years, and don’t need this kind of micro supervision, the word RBI uses for interference. It also almost appoints a CEO, albeit on an interim basis to private sector banks, subject of course to the formal approval of the shareholders.
Why would any investor in his/her right mind appoint a CEO who would prove detrimental to the interest of the bank?
Of course in the case of the PSU banks, where the abysmal record speaks for itself, the Central government brooks no such interference and appoints the MD and most of the board too! The RBI has for long lamented that it has no powers of appointment or removal of public sector bank chiefs and, therefore, cannot be responsible for their poor financials.
Even though it does have a director appointed on each of these banks, and even though it has wide powers under its annual inspection of all banks, including PSUs, and yet has proved to have little influence on the financial situation at any given point in time.
Given that the PSU banks account for nearly 70 per cent of all lending in the country, that is a lot of management appointments outside the control of the RBI. Unlike in the private sector, deposits placed with the PSU banks come with an implicit guarantee from the government. But if the government, as the owner of listed public sector banks, can exercise its rights in full, surely investors in private sector banks must have similar rights?
Why would any investor in his/her right mind appoint a CEO who would prove detrimental to the interest of the bank? And perhaps the RBI could be given some powers to deal with extreme situations. In reality, though, such performance parameters have been historically skewed against public sector banks.
It is a good thing that in both LVB and in Dhanlaxmi the shareholders chose to throw out the RBI-appointed CEOs. The shareholders have shown that their approval need not be treated as a formality. The right of the depositor is paramount, but the investors themselves determine how much they can be taken for granted.
Only by standing up can they let it be known to the regulator that the interest of the depositor cannot completely be at the expense of the investor. Two cheers for democracy.