Axis Bank has been making headlines for all the wrong reasons for quite some time now. Last summer, it was a major problem with non-performing asset (NPA) divergence post the RBI's annual audit exercise for 2016-17 - in fact, the apex bank's classification of NPAs was 156% more than its reported numbers.
Then, in December 2017, came a rap on the knuckles from market regulator SEBI, ordering Axis Bank to strengthen internal processes and conduct an inquiry into the leak of its financial results on WhatsApps groups ahead of the official announcement.
Three months into 2018, the bank has faced issues like an RBI fine for non-compliance with its asset classification norms, exits/forced resignations at the top level, and fighting a legal battle against the Telecom Department's recent order against new bank guarantees from Axis Bank.
The woman at the helm of affairs through all this, Shikha Sharma, is now reportedly facing heat from the banking regulator. According to The Economic Times, the RBI has asked the Axis Bank's board to reconsider its decision to reappoint Sharma as MD and CEO for a fourth term beginning June 2018. She has been heading the bank since June 2009, and last July the board of directors had decided to keep her in the hot seat for another three years, till 2021.
Sources in the know told the daily that the RBI had addressed its letter to Axis Bank chairman Sanjiv Misra and cited the bank's performance and its deteriorating asset quality as grounds for its objection to the reappointment. Axis Bank's NPA problem has snowballed from around Rs 1,200 crore in December 2009 to a scary Rs 25,000 crore as of end-December 2017. The sources added that the board is now considering a one-year term for Sharma, during which it will look for a successor.
In response to these developments, Axis Bank reportedly said that "The bank's board follows a standard process on senior appointments, and forwards its recommendations to the regulator. This process is currently in progress and we are unaware of any final decision on this issue." The statement adds that "the correspondence between regulator and bank is strictly private and confidential".
Is this RBI move a reaction to the recent war of words with the government over its accountability for the Nirav Modi-PNB fraud? Last month, indirectly blaming the RBI for belatedly waking up to the fraud, Finance Minister Arun Jaitley was quoted saying that regulators "ultimately decide the rules of the game and they have to have a third eye kept perpetually open and turned towards the sector. But unfortunately, in (the) Indian system, we politicians are accountable, the regulators are not."
In response, RBI Governor Urjit Patel had retorted that the apex bank had better regulatory control over private banks than the state-owned ones, blaming the "system of dual regulation by the Finance Ministry in addition to RBI" for the same. By questioning the decision of Axis Bank's board to reappoint Sharma, the RBI could be signalling that it intends to scrutinise bank CEO appointments much more closely here on.
Perhaps, it's high time it did so. Insight provider Hemindra Hazari on Smartkarma in a report has warned against the myriad problems that come hand-in-glove with long CEO tenures. "Strangely, while sound banking practices insist on regular transfers of personnel in key posts and a maximum tenure for independent directors, the Indian regulator seems to have given a long lease to Aditya Puri [HDFC Bank chief] and the other private bank CEOs," Hazari said.
According to him, when a CEO has a long tenure, he/she tends to dominate the board of directors, which may feel beholden to the former, especially if the share has performed well. "The board, along with the other major players - the media, analysts, shareholders and even the regulator - become in awe of the CEO, and the CEO's decisions are uncontested. Such a feeling of complacency and hero worship is not a healthy sign, especially in a bank, which primarily manages public funds," he adds.