On 1 May, the board of UTI Bank Ltd passed a resolution recommending its chairman and managing director Pangal Jayendra Nayak for the post of the bank’s executive chairman for a term of two years starting 1 August.
Had the board not decided to make him executive chairman, Nayak would have stuck to his decision to quit after he reaches 60 on 31 July, as the Indian banking regulator does not want him to hold the dual post of chairman and managing director.
It isn’t clear whether the Reserve Bank of India will now approve Nayak’s tenure extension in the new role. The Indian central bank wants to split the post of chairman and managing director at UTI Bank, in accordance with the recommendation of a panel that was set up in 2002 under the chairmanship of former Hindustan Lever Ltd chairman S. Ganguly. The panel was in favour of splitting the top post in all large banks for the sake of better corporate governance.
RBI, according to people familiar with the matter, had told Nayak about its decision to split the post one-and-a-half years back. At that time, he was also asked to put in place a succession plan for the top job at the bank.
“The RBI move should not come as a surprise to the bank as Nayak was told well in advance that the top post would be split when his term comes to an end. He has also failed to identify his successor. One should not hold the regulator responsible for his failure in identifying and grooming the next chief (of the bank),” said this person familiar with the development. He didn’t want to be quoted because of the sensitive nature of the issue.
This raises the question, as it has in Indian banking circles, as to whether Nayak has made himself indispensable, at least for now, by not grooming a successor. A person at UTI confirmed that Nayak was informally told by the regulator about splitting the post but there was no formal communication to this effect.
“Right now, the bank has three senior executives but none of them has a reasonably long term (left) to be made the chief,” says this UTI person. “At the same time, if an outsider is brought in, it may not go down well with the bank executives and end up harming the bank’s interest. So, continuing with Nayak is the best option at this point.”
Very few people, including those at RBI, contest this notion. After all, Nayak’s track record as a banker has been impeccable. Between 2000, when Nayak took over the bank and now, UTI Bank’s net profit has shown a compound annual growth rate of over 44%. Its deposits, advances and total assets too have grown by 36-40%.
“However, one should know how to retire gracefully. After all, we have the instances of N.R. Narayana Murthy and Nandan Nilekani before us,” says one banking industry executive who also didn’t want his name used. Murthy retired from the post of executive chairman of software giant Infosys Technologies Ltd when he turned 60 in July 2006 and CEO Nilekani, 52, said he will become co-chairman in June, making way for chief operating officer and managing director S. Gopalakrishnan to become CEO. Both of them are part of the original group of seven engineers who promoted Infosys in 1981.
Not everybody in banking actually agrees with the need to split the chairman and managing director’s job. T.R. Madhavan, managing director of Centrum Finance, a boutique investment bank based in Mumbai, and a former head of a private bank, feels that splitting the top post will only weaken banks. “A chairman holding a non-executive position does not necessarily add to the strength (of a bank) as he normally tends to support the promoters on crucial issues and not the managing director. Also, often the non-executive chairman is not a career banker,” Madhavan says.
However, a former chairman of a large public-sector bank, who does not want to be quoted, says he feels strongly that the top position should be split between chairman and managing director. “While the chairman should focus on vision, the managing director should run the show,” he says, citing the example of State Bank of India, the country’s largest commercial bank, where the chairman and managing director have different roles to play.
Banking consultants say the problem is that RBI has a two-faced policy on this issue. “You cannot have two sets of rules—one for the public sector and another for private banks. Even among the private banks, new private banks generally have split top positions while old private banks continue to have the chief holding the dual responsibility of chairman and managing director,” says one consultant who advises banks on their business restructuring.
India has two sets of banks in the private sector. The set of private banks that were given licences in the mid-1990s and early this century are called new private banks and others, who have been operating for decades, are old private banks.
Old private banks, such as Ratnakar Bank Ltd, South Indian Bank Ltd, Nainital Bank Ltd, Lakshmi Vilas Bank Ltd, Karur Vysya Bank Ltd, Federal Bank Ltd and Jammu & Kashmir Bank, are run by executives who hold the dual position. Public-sector banks, which account for 75% of the Indian banking industry, too have CMDs running the show. The government appoints the CMDs of public-sector banks while RBI gives the mandatory approval for the appointment of the top guns in the private sector banks—old and new banks alike.
Incidentally, the Ganguly panel that recommended the splitting of the top post in banks does not refer to the private banks at all. The executive summary of the report, in fact, talks about separating the “office of chairman and managing director in respect of large-sized public sector banks”. The main report talks about “large-sized banks” and says: “The group is of the view that this functional separation will bring about more focus and vision as also the needed thrust in the functioning of the top management of the bank.” UTI Bank is indeed a large bank, the third-largest private bank in India, after ICICI Bank Ltd and HDFC Bank Ltd. And it is the only new private bank that has not split the top post yet.
Meanwhile, RBI hasn’t been very consistent either when it comes to the appointment of bank chiefs. The banking regulator initially declined to approve the appointment of Naina Lal Kidwai as head of HSBC’s India operations as Kidwai is also on the board of Nestle AG and the banking norms in India do not allow the CEO of a bank to be on the board of a corporation. Later, RBI changed is stance and cleared Kidwai’s appointment.
This is the second instance of Nayak offering to resign from the bank, an assignment he took over after resigning from the Indian Administrative Service.
Nayak’s initiation into the Indian financial sector was in 1996 in the role of an executive trustee of the Unit Trust of India, the country’s largest mutual fund until recently, after he had a stint at the department of economic affairs, ministry of finance, and was joint secretary, in charge of the capital markets division. He took over as CMD of UTI Bank in January 2000.
Apart from two resignation offerings—once in December 2004 and the other more recently—Nayak also went on a month’s leave in July 2002 and resumed office only after the UTI Bank board exonerated him from an indictment in a draft report of a parliamentary committee. The indictment was for UTI Bank’s failed merger with another private bank, the Global Trust Bank, that was linked to a stock market scam.
The first time he offered to resign was when the bank wanted to split the CMD’s post and asked Nayak to continue as MD after his five-year term came to an end. Nayak then rejected the offer and quit, but the board quickly chose to keep him at the helm for another five years. Now, two years before the term comes to an end, he wants to hang up is boots unless he continues to have executive powers. For now, he has his way.