RBL may need new talent at the top

Latest developments may affect its performance, investors need to be given confidence about its prospects

In other words, the central bank is of the view that RBL Bank needs assistance with both regulation and supervision.

The developments at RBL Bank over the weekend cannot be construed to be routine, and it is just as well the Reserve Bank of India (RBI) has clarified the financial position of the lender is ‘satisfactory’ and that it is well-capitalised. After all, the move by the central bank to appoint an RBI executive to the board of RBL Bank, as additional director, coincided with the sudden departure of the former CEO & MD Vishwavir Ahuja, who has been running the bank as its top-most executive for many years now. Depositors would be reassured their money is safe, but other stakeholders will await more clarity on the goings-on at the lender.

Not surprisingly, the RBL stock collapsed by nearly 20% in Monday’s session.RBI said on Monday that the appointment of its executive, Yogesh Dayal, to the RBL board has been made under Section 36AB of the Banking Regulation Act, 1949. This is an important clarification because such appointments are typically considered necessary when RBI feels the board of a private bank needs closer support in regulatory and supervisory matters. In other words, the central bank is of the view that RBL Bank needs assistance with both regulation and supervision.

Vishwavir Ahuja’s term was to expire in June 2022, and it is possible the lender was not moving fast enough on succession plans and, therefore, the central bank felt it was necessary to step in. However, given that similar action by the central bank in the recent past has been related to compliance, governance , or business risk, there are apprehensions all might not be well. Indeed, there is the question of whether the sudden exit of Ahuja is related to a failure of corporate governance—or a suspected breach.One can understand the central bank’s reluctance to say much more at this point; perhaps, it wants to first conduct a thorough investigation.

After all, its primary concern would be the financial condition of the lender and whether the latter has enough liquidity to keep the daily operations going and, in this context, it seems satisfied. At the end of September, RBL’s capital adequacy ratio was a comfortable 16.3% while the provision coverage ratio (PCR) was 76.6%. Moreover, the liquidity coverage ratio (LCR) of the bank is currently a fairly robust 153% as against the regulatory requirement of 100 %. Nonetheless, the central bank is sure to keep a close watch on the lender’s operations because, by its own admission, it has faced some problems on asset quality and it posted a loss of Rs 459 crore in Q1FY22.

That the central bank has not felt it necessary to initiate a change in the top team immediately or bring in external talent to run the bank suggests there is no cause for alarm.Nonetheless, given the stress in the banking system and the near-collapse of banks like Yes Bank and Lakshmi Vilas Bank, there cannot but be concern in the financial markets. Perhaps some fresh blood at the top level would help restore the confidence of other intermediaries and investor even though such a move may not always have been successful at other lenders.

The management has said the bank needs to raise capital if it is to achieve next year’s loan growth targets, but that would be difficult unless investors are confident about its prospects; the management may claim the bank is on the mend but the latest developments could have some repercussions on the lender’s performance. Several analysts have suspended coverage of the stock and the appointment of Rajeev Ahuja as interim CEO does not seem to have been enough to allay their apprehensions. What’s heartening is that the central bank seems to be on top of things; we should expect some decisive action in the months ahead.

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