HDFC’s drama raises questions
What is it that they say about a coin? There are two sides to it, like is the case with most issues, controversies, and debates. The same is true about the ongoing HDFC Bank drama, which resulted in the resignation of a chairman, media headlines about what was wrong with the bank, interesting takes by experts and regulators, and a steep decline in the stock price. Let us consider the two scenarios of what the case is about, and what it is not. The fact remains that the sudden exit has cast a long shadow, and raised more questions.
In Scenario 1, let us agree with the former chairman, Atanu Chakraborty, who led the bank for two years, and resigned because he saw practices that were ethically troubling. But one can easily contend that why did he not formally raise the same concerns when he was at the bank? He did not escalate the matters to the board, and neither did he alert the Reserve Bank of India (RBI), or the Securities and Exchange Board of India (Sebi). There was nothing on record.
Instead, the so-called problems, which were never explained, described, or articulated during Atanu’s subsequent interviews to the media, were only hinted at, both in the resignation letter, and statements. Indeed, many of the comments to a TV interview asked if anyone understood what he said or meant, and his language was so bureaucratic. Obviously, in the confusion, the stock market reacted quickly. The stock fell sharply, which impacted investors’ wealth, and forced the bank to reassure both the depositors and investors about governance and financial strength. Since the resignation drama, the share price is down by INR 90, with the lowest being INR 110, or 13 per cent down. This year, the decline is 25 per cent.
Of course, one can ask a legitimate question. How should a senior executive, like the chairman, MD, or CEO, of an important firm, like HDFC Bank, which was once the bank with the largest market cap, and the third-largest on the Indian exchanges, behave in such situations? One can adopt the whistleblower’s approach, and do the right thing as per the law, and through the proper channels. If one stays silent during the tenure, and then resigns to raise a brouhaha without details, it does create confusion and risk, as was the case here.
However, accountability is never a one-sided sword. There is another way to look at the same scenario, and reach a different conclusion. Much of the criticism of Chakraborty’s exit focuses on the vague wording of the resignation letter, statements that hint at issues but stop short of making clear allegations. But this may not be accidental, but a well-thought-out and deliberate strategy. Think about the alternative. If he had mentioned the issues related to the unethical practices, the impact would be worse. Apart from the deep plummet in the share price, it could have created a run on the bank, which might trigger panic across the banking and financial system.
In a country like India, where trust in banks is critical, even the perception, or a whiff, of a problem spreads quickly. People rush to withdraw money. Long queues form outside the bank’s branches. One has witnessed such situations during banking crises, when the RBI needed to assuage the feelings, and put a cap on withdrawals of deposits. Liquidity pressure rises immediately. As fear envelopes one of the largest banks, it is inevitable that it will spread, and spill over to the other banks. That is why Atanu’s choice of words mattered.
As one of the comments to his interviews stated candidly, and categorically that the former chairman tried to balance the pulls and pressures, and the positives and negatives. By raising the concerns, without direct, pertinent, and pointed charges, Atanu flagged the issues, but avoided a panic. Well, at least, he restricted the latter to the stock price, and stock market. Hence, he squarely put the spotlight, as he should, on the regulators, RBI and Sebi. It is up to them to investigate the issues thoroughly, and clearly communicate the outcomes. In the end, a system built on trust can collapse due to the words from the top, but they can also inform and prevent panics.
Sebi needs to request a detailed explanation from Chakraborty, which include facts, timelines, and specifics. This is what the regulator seems to have done, or at least indicated what it will do. At the same time, the RBI must check if there were lapses in governance, risk management, or compliance that were not reported earlier. What is at stake is more than an individual, even if he was the former chairman, and a bank, even if it had one of the largest market caps. What matters in this case is the trust of millions of depositors and investors, whose wealth and value depend on the stability of the banking system.
Indeed, the statement by the bank employees is revealing. More than the RBI and Sebi, the association wants the finance minister to intervene, and involve agencies like the Central Vigilance Commission, and Central Bureau of Investigation. According to its statement, it wants the matter to be examined by the “relevant parliamentary committees, given its systemic implications, and public interest.” More importantly, there needs to be public disclosure of the various findings, whether it is by the RBI, Sebi, or CBI. This is crucial.
One needs to understand that in the developed nations, whistleblowers are given undue importance, and their charges are pursued by the regulators and investigators in most cases. In India, especially when it concerns public, policy, and regulatory matters, the whistleblowers are buried, if they do not go public. The allegations vanish. Even when questions are raised publicly against either seniormost regulatory officials, or firms, the outcomes are clean chits, puny fines, and out-of-court settlements. We have seen this happen often enough in the past, and there are no guarantees that they will not be repeated in the future. Atanu’s actions reflect this.
One of the wheels has already swung into action. Media reports indicate that HDFC Bank “does not intend to file a legal suit or seek damages against its former non-executive chairman…. The lender is instead focused on improving its third-party sales practices, and enhancing governance standards….” Clearly, the bank’s focus is to restore confidence. It may seem that it does not wish to open a Pandora’s Box, if it exists. It wants the buck to stop here, right now.
