Clawback time for bank CEOs

Clawbacks are not uncommon in the US and can be particularly gratifying for shareholders and many groups of stakeholders, particularly when the money being taken back is from a former and powerful business leader who is seen in violation of regulations, trust and actions that have brought losses and disrepute. Clawbacks have now made their way to India, notably with the banking sector and a set of banking regulation guidelines that hold leadership responsible for past actions even after they have quit their positions. Last week reports came in that Yes Bank, the fourth largest private sector bank in the country and one that was noted for its stupendous growth path under its promoter and former CEO Mr. Rana Kapoor, has asked him to pay back bonuses totaling Rs.1.44 crore.

The clawback came in line with directives from the RBI, which is now seeking to further tighten its guidelines on CEO compensation. The change comes not a day too soon, particularly in the light of ballooning Non-Performing Assets (NPAs), the poor quality of reporting that has come forth from some of the banks and questions on falling performance and skyrocketing pay. ICICI Bank has also announced clawback of bonuses and ESOPs paid of its powerful former CEO Ms. Chanda Kochar, who the bank said was “in violation of the ICICI Bank code of conduct, its framework for dealing with conflict of interest and fiduciary duties.” She has reportedly contested the demand from the bank.

Clawbacks have now made their way to India, notably with the banking sector and a set of banking regulation guidelines that hold leadership responsible for past actions even after they have quit their positions. Last week reports came in that Yes Bank has asked its promoter and former CEO Mr. Rana Kapoor to pay back bonuses totaling Rs.1.44 crore.

The banking business, at least in principle, is fairly simple and straightforward. Banks primarily take funds from those who have them and lend these out to those who need them, powering economic activity and making money in the bargain. A bank is a business but not everyone is allowed to run it because a bank uses the money of people, not shareholders, to turn-in profits for its shareholders. So strong regulatory oversight is an important part of banking activity, and central banks (the RBI in India) are empowered to keep a hawk eye on banks and mandate boundary conditions under which they must operate to the benefit of society.

Regulations primarily are meant to guard against various risks, and particularly the solvency risk so that the money of the people is protected. This means banks must be well capitalised, they can’t finance anyone and everyone, and CEOs have a greater set of checks and balances on how they are compensated. In a particularly clear and succinct provision, the Banking Regulation Act, which lays down what is regulated and how it is regulated, says: “No banking company shall employ or continue the employment of any person…whose remuneration is, in the opinion of the Reserve Bank, excessive.” We may ask what is “excessive” in the eyes of the RBI, but then the idea is fairly simple: banks are not places for CEOs to be riding high, particularly if the bank isn’t doing too well or has other red flags.

The banking system has of course grown to become much more complex, a lifeline for the economy but also sometimes turned and twisted so much that the official language and currency can rob away the essence of what is being done, what is reported and the health of the bank and the banking sector in general.

The Banking Regulation Act, which lays down what is regulated and how it is regulated, says: “No banking company shall employ or continue the employment of any person…whose remuneration is, in the opinion of the Reserve Bank, excessive.” We may ask what is “excessive” in the eyes of the RBI, but then the idea is fairly simple: banks are not places for CEOs to be riding high, particularly if the bank isn’t doing too well or has other red flags.

Consider “divergence” in asset quality and the case of Yes Bank, where the promoter-CEO had to eventually make way for a new incumbent earlier this year amid RBI displeasure on divergence in the asset quality as reported by the bank. Apart from bonuses now taken back (he had received a bonus of Rs. 62 lakhs for FY 2014-15 and Rs.82 lakhs for FY 2015-16. The bank had not paid any bonus to Rana Kapoor for FY 2016-17 and FY 2017-18), he was rather well paid with a salary of Rs. 64.8 million in FY 2018-19. He was replaced in Jan. 2019.

What exactly is “divergence” in asset quality? This is language and terminology that can make a wild violation look like ordinary banking activity. Today, “divergence in asset quality”, which necessarily brings into question the entire reporting framework of the bank, is a number reported, and that too because the RBI stipulates that large divergences be reported. Consider that the Gross NPAs as on March 31, 2017 as reported by Yes Bank were Rs. 20,185.57 million but this same head as assessed by the RBI stood at Rs. 83,737.57 million – a “divergence in Gross NPAs” of Rs. 63,551.99 million, or a “divergence” of more than 300 per cent. Net NPAs as on March 31, 2017 as reported by the Bank were Rs.10,722.68 million but Net NPAs as on March 31, 2017 as assessed by the RBI showed up as Rs. 58,916.24 million, a “divergence” of Rs.48,193.56 million, or some 450 per cent. In the previous year, Net NPAs of Yes Bank showed a deviation of an astounding 1,166 per cent (Net NPAs as on March 31, 2016 as reported by the Bank were Rs. 2,844.74 million while Net NPAs as on March 31, 2016 as assessed by the RBI were Rs. 36,031.49 million). Such divergence has also been an issue at another private sector bank, the third largest, Axis Bank, whose CEO, too, did not seek a new term amid reports that the RBI was disinclined to favour her continuance.

While the RBI needs all the support to push in its endeavor to hold CEOs to account for their actions and for the quality of reporting, what also stands out is that it is the public release of this information and the public naming of banks that makes all the difference.

Bankers can argue that numbers do get interpreted in various ways and that the RBI lens may be particularly harsher than the lens used by banks to report their numbers. But in the end, a number is a number, and however extenuating a circumstance, the “divergence” cannot be so large as to make the entire reporting exercise meaningless. This is not divergence; it carries all the marks of concealment and misreporting. While the RBI needs all the support to push in its endeavor to hold CEOs to account for their actions and for the quality of reporting, what also stands out is that it is the public release of this information and the public naming of banks that makes all the difference.

It was but a few months ago that Yes Bank issued a press release in which it claimed that there was “nil divergence” in the latest risk assessment report it received form the RBI. Prompt came the reply from the RBI, asking Yes Bank not to mislead the public and stressing that the RAR was a confidential document between the bank and the RBI, that its contents were not to be revealed and that “nil divergence” was not an achievement but a mere meeting of the guidelines. Further, the RBI found several other lapses and breaches by the bank and releasing one part of the report was “a deliberate attempt to mislead the public.”

What worked was the RBI demand that this stricture be released, just as the divergence is now mandated to be published when it exceeds a threshold of 15 per cent. The message the RBI must take is simple: Disclose. Disclose more. Disclose as much as you can. And then some more. Sunlight is said to be the best disinfectant. It will keep the RBI and the banks on their toes and the public safe and properly informed. In the end, very little if anything at all must be kept confidential because what is at stake is the trust and money of the ordinary citizens of India.

(The writer is a journalist and a faculty member at SPJIMR. Views are personal)