Raghuram Rajan's RBI not to allow promoters to become CEOs of private banks

Written by George Mathew | Mumbai | Updated: Apr 15 2014, 00:15am hrs
RBITo be enforced when it allows new banks to come up to avoid conflict of interest
The Reserve Bank of India is unlikely to allow the promoters of private banks to become CEOs when it allows new banks to come up.

The Central bank is keen that the promoter doesnt become the chief executive in order to avoid conflict of interests and other vested interests. The RBI made the mistake of allowing some private banks to come up with the promoters becoming CEOs as well. It should not happen again, said a senior official of the RBI.

The promoters and CEOs of two private banks Kotak Mahindra and Yes Bank which came up in 2004 are the same. Global Trust Bank, whose CEO and promoter was Ramesh Gelli, went down in a scam and was later merged with Oriental Bank of Commerce.

In the case of Kotak Mahindra Bank, Uday Kotak is the executive vice-chairman and MD, while Rana Kapoor is the MD, CEO and a stakeholder in Yes Bank. On the other hand, chairman and MD/CEO posts in all other private banks are already split and no promoter is MD/CEO in leading private banks like ICICI Bank, HDFC Bank and Axis Bank.

The RBI had earlier recommended splitting the posts of chairman and MD in public sector banks. However, this proposal was shot down by the finance ministry which is keen to continue the present system. The RBI had set up a committee under the chairmanship of AS Ganguly in 2004-05 to study the issue of bifurcation of the post of chairman and MD in banks. Private sector banks started implementing this in 2007.

Between the two entities IDFC and Bandhan which have received the banking licenses, the IDFC, with a wide range of shareholders, is a professionally-managed company and both executive chairman Rajiv Lall and CEO Vikram Limaye are professionals and the same pattern will be followed for the newly-opened bank. However, it is worth watching what Bandhan proposes as it is managed by Chandra Shekhar Ghosh, the promoter of the microfinance company.

As per the RBI guidelines, non-operative financial holding company (NOFHC) which promotes the bank should be wholly owned by the promoter group and 50 per cent of the directors of the NOFHC should be independent directors.

Unlike PSU banks, private banks have a different system to get CEOs and they look inside and outside for candidates.

For example, Shikha Sharma was with the ICICI group when she was selected Axis Bank MD and CEO. The then Axis Bank chairman P J Nayak dissented with the board decision and quit.