Home >Markets >Mark To Market >Why RBI's distancing norms for bank CEOs make sense, but look odd

No sooner did the Reserve Bank of India (RBI) put out its discussion paper on governance in India’s commercial banks, than it became clear that Kotak Mahindra Bank Ltd will be the most-affected if the suggestions become regulations.

The paper proposes to limit the tenure of a promoter managing director (MD) or chief executive officer (CEO) of a bank to 10 years. The tenure of a non-promoter MD or CEO would be limited to 15 years. Uday Kotak has been at the helm for about 17 years, which means he will have to step down soon if the proposals become law.

Kotak Mahindra had taken RBI to court on differences about promoter shareholding caps, but withdrew its petition earlier this year after the two reached a compromise. While a discussion on the tenure of a bank CEO is important, the timing of it is intriguing. “There is a worldwide debate on the ill-effects of long tenures of bank CEOs. But the timing of the paper and RBI’s decision to distinguish between promoter CEOs and non-promoter CEOs does raise questions, especially since it comes on the back of the dispute with Kotak Bank on promoter shareholding norms," said an expert on corporate governance who asked not to be identified.

Yet, while RBI scores poorly on optics, the paper does raise important questions related to bank governance. Indeed, given the governance-related troubles at many Indian banks, one can even argue why the discussion has taken so long.

Banking experts believe the cap on tenure is a good step as it reduces the freedom of a CEO to keep a tight grip on business. The fallout of rash decisions by promoters is visible from the near collapse of Yes Bank Ltd under the watch of co-founder Rana Kapoor. In the past, too, promoter CEOs have been the source of trouble in the case of Bank of Rajasthan and Global Trust Bank.

In the US, the long, continuing tenure of Jamie Dimon at JP Morgan has led to criticism that the bank has lost key talent as potential CEOs got tired of waiting and left the firm. A similar situation has played out at India’s largest private sector bank, HDFC Bank Ltd. So, even if mis-governance isn’t detected, there can be other troubles that arise.

“The CEO allegiance hypothesis suggests that with greater tenure and familiarity with the CEO, relationships will favour the CEO versus shareholder interest," according to a paper published in Managerial Finance on the tenure of directors on a bank board by John Byrd et al. “Familiarity breeds cult following," said a professor of finance requesting anonymity.

Since banks have the fiduciary responsibility of safeguarding public money, a robust discussion on bank governance is evidently overdue.

But, as is the danger with most regulations, RBI should resist the temptation of over-regulation. “We need to think about a case-by-case approach, rather than have an overarching rule," said Umakanth Varottil, associate professor, faculty of law, National University of Singapore.

A former deputy governor at RBI said, “A lot of this is judgement. So the regulator has to reconcile with the fact that bad promoters will turn up. What the regulator can do is minimize as much as possible the effects of bad promoters on the bank".

Rather than try and avert every possible crisis through regulations, other aspects such as bank supervision need to be reviewed as well.

All told, as RBI begins to fix little bugs in regulation, bank promoters and CEOs need to get ready for a new normal of distancing themselves from their businesses. For Kotak, this brings succession planning closer in timeline.

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