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In recent years, India has seen the exit of at least half a dozen CEOs of private banks and non-banking finance companies amid charges of governance and management lapses. The latest in this ignominious list is the RBL Bank. Its CEO’s departure appears to be a fall out of the top management’s handling of specific credit accounts, as reported by Mint.

The banking regulator, the Reserve Bank of India (RBI), seldom makes the rationale for its intervention in such cases public, leaving depositors, stock markets and the public guessing about the reasons for its discomfort with the bank in the dock.

RBL’s case is no different. RBI sent a letter to the bank on 24 December stating that it had appointed its chief general manager Yogesh Dayal on the bank’s board. In the 25 December board meeting, Dayal said the continuation of chief executive Vishwavir Ahuja had become untenable, and if he did not step down immediately, RBI would have to supersede the board, as it had for Yes Bank and Lakshmi Vilas Bank.

There is no official word on what led the RBI to take these decisions. Notably, in June last year, RBI had approved the reappointment of Ahuja for a year instead of the three-year term sought by the bank.

The RBI’s critics say it is making too few disclosures, which is ruffling the markets, and that it is maintaining differential supervisory standards for different banks.

But just three years ago, in 2018, reacting to the Rs-13,600 crore fraud in the state-owned Punjab National Bank, the RBI’s critics had accused the RBI of poor regulatory oversight. Then finance minister Arun Jaitley had lashed out publicly at the regulator for what he called was its “failure" to detect the fraud.

All-round criticism appears to have prompted a pushback by the RBI, starting from the tenure of former Governor Urjit Patel. The banking regulator appears keen on a new proactive approach.

It introduced a new framework for strengthening corporate governance in commercial banks in June 2020. It wants increased scrutiny of the role of promoters, major shareholders and senior management vis-a-vis that of the board and a greater focus on banks’ boards for fostering the culture and values that would ensure banking business is conducted in a legal and ethical manner.

The RBI’s strategy for reining in larger-than-life private bank CEOs and lifting fledgling governance standards is to make banks’ boards more accountable. It also seeks to cap the tenure of CEOs, including the high performers that bag ‘best banker’ awards year after year and become the toast of stock markets.

If the RBI can strike balance between being pre-emptive and intrusive on regulation without undermining the boards of listed banks and their shareholders, the new approach could work.

There is a risk in reacting to governance failures in private banks with successive regulatory interventions. The risk is that the RBI can create an atmosphere of distrust and end up weakening the case for the issuance of more universal banking licences. That would be a tragedy. That the RBI is being cautious is reflected in the fact that just two banking licences were handed out in the last round.

Rather, it seems to be far more open to providing differentiated licences -- for payments and new finance banks as a way to boost competition. But this is unlikely to take care of competition in an economy as large as India.

The biggest gain of opening the banking sector to the private sector two decades ago has been increased competition. The banking network and efficiency have grown swiftly, and customer service and products have improved by leaps and bounds, with private banks dominating the pecking order. Banks have a fiduciary responsibility towards public depositors. But it should not be the case that by seeing shadows everywhere, the regulator ends up crimping competition and the financial services sector comes to be controlled by a handful of dominant players.

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