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After the precipitous fall on Tuesday, shares of AU Small Finance Bank Ltd saw some relief on Wednesday, rising 1.9%, after the bank’s management tried to allay fears about governance. But investors don’t seem to be entirely convinced. On Tuesday, the stock had slumped 13%.

The problem was simple but grave. The small finance bank’s chief risk officer (CRO) resigned in July but the bank informed investors about the same on 29 August.

To be sure, regulatory rules require banks to inform about the appointment of a new chief risk officer. To that extent, the bank has followed the letter of the law. But investors believe that the spirit of the rule wasn’t preserved.

Stressed out
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Stressed out

Further, CRO Alok Gupta’s exit comes a little too soon for comfort after the resignation of Nitin Gupta, the lender’s former chief audit officer, in March. Nitin Gupta moved to competitor Equitas Small Finance Bank Ltd. Moreover, the bank’s internal audit officer too is on his way out.

“We believe the resignations in audit/risk functions may raise investor concerns about the sanctity of the books/risk management practices. However, the management has tried to allay such concerns and indicated that there were no red flags by the RBI (Reserve Bank of India) in its recently completed audit," analysts at Emkay Global Financial Services Ltd wrote in a note.

AU Small Finance Bank released a statement on Tuesday detailing the reasons behind the recent exits. It said personal reasons had motivated Alok Gupta to quit. The resignation of internal audit officer Sumit Dhir was not disclosed as the bank was making efforts to retain him. As such, regulation doesn’t require the bank to report audit personnel exits.

“Announcement based on just his expression (to resign) would be difficult... It is a simple HR (human resource) issue, not a governance one," the management said in the investor call on Wednesday.

The deal-breaker in the case of Dhir seems to be the location. The bank is headquartered in Jaipur, Rajasthan and requires its audit team members to work out of there. The management said Dhir was keen to relocate to New Delhi due to personal reasons. In an age of digital banking and work-from-home, the location of work being a rigid requirement seems odd.

Management roles, such as risk and audit, act as a check for business exuberance, critical in a fiduciary organization such as a bank. A series of exits from such roles in quick succession is sure to make investors anxious, given the unfavourable optics.

Ever since the collapse and the resurrection of Yes Bank Ltd, investors have been antsy on any indication of governance foul play in banks. Even the most valuable lender, HDFC Bank, had a brief spell of investor angst last year after a flurry of senior-level exits. The covid-19 pandemic has only intensified these concerns.

AU Small Finance Bank’s performance metrics, too, haven’t been much of a comfort. The lender reported a sharp rise in gross bad loans in the June quarter and an increase in provisions. As such, small finance banks reported a severe impact of the second covid wave, reflected in the increase in their stressed loans. The lender has not been an exception to this.

“In our view, steadily rising asset-quality concerns amid the covid-induced disruption, the series of resignations in the audit/risk functions and delayed disclosure of these resignations have irked investors," said the Emkay report, adding that valuations leave little room for error.

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