HDFC Bank: 'When You Have Cracks In 3 Places At Once...'

'The sales pressure on the ground, a board and CEO not fully aligned, and a senior team that isn't pulling together -- that's when these things surface.'

In the first half of this interview with Prasanna D Zore/Rediff, Tamal Bandyopadhyay -- author of two books on HDFC Bank -- A Bank for the Buck and HDFC Bank 2.0: From Dawn to Digital -- traced how HDFC Bank changed hands from Aditya Puri to Sashidhar Jagdishan, and why the merger with parent HDFC -- the biggest task handed to the new CEO -- has still not paid off the way the bank's two earlier mergers eventually did.

He was careful to draw a line, though: None of this, he argued, is a story of bad assets or a balance sheet at risk. Whatever has gone wrong at HDFC Bank, he says, "the issues are very different."

• Part 1 Of The Interview: 'HDFC Merger Contributed To HDFC Bank's Troubles'

That distinction matters, because it is precisely what the bank's troubles turned into once they reached the front pages. Atanu Chakraborty's resignation as part-time chairman in March, over what he called practices out of step with his 'values and ethics', wiped out tens of thousands of crores in market value within days and forced the Reserve Bank of India into the unusual position of publicly reassuring investors that the bank remained well capitalised.

Independent legal reviews commissioned by the board later found no basis for his allegations, but the questions didn't go away.

In July, the bank's board fined MD and CEO Jagdishan, CFO Srinivasan Vaidyanathan and retail-assets head Arvind Vohra Rs 1 lakh each over a Rs 45 crore deposit arrangement with a Maharashtra state road agency -- a penalty the RBI itself then asked the bank to explain.

Separately, the bank's Dubai operations have faced scrutiny over the sale of an overseas investment product, with affected clients said to be considering approaching regulators in India and abroad.

Then, on August 29, came the announcement that reframed everything: Jagdishan would not seek reappointment and will step down on October 26.

In the concluding part of an illuminating interview, Bandyopadhyay unpacks what the pressure to hit sales targets does inside every Indian bank, why he resists the idea that HDFC Bank was ever a governance benchmark, and who he thinks might run the bank next.

'Why single out HDFC Bank as the gold standard and then treat this as some dramatic fall from grace?'

One of the bigger questions arising from recent events is whether corporate governance is ultimately about having the right people or the right systems. What does the HDFC Bank experience tell us?

Let me first push back on the framing that's crept into a lot of commentary -- that HDFC Bank was some kind of governance benchmark that has now suddenly fallen. I'm honestly not sure where that idea came from.

In the past, no governance issue came to light as far HDFC Bank is concerned. But it's not alone -- there are so many other banks, including India's largest lender State Bank of India, in that league.

Why single out HDFC Bank as the gold standard and then treat this as some dramatic fall from grace? I don't buy that framing.

What does the HDFC Bank episode tell us? There is no one factor. It's the board, the management, the business philosophy, the people -- all of it together.

I often use a simple example. You're driving, the light turns red, you stop -- you're following the rule. But the light turns green and you still hold back because you can see someone crossing the road. That's real governance.

Merely following the rulebook is mechanical; governance is what you do when the rulebook doesn't quite cover the situation.

Now, across Indian banking -- I'm not singling out HDFC Bank here -- there is enormous, relentless pressure on staff to hit sales targets for deposits, loans, selling third-party products, generating fee income and so on.

Talk to any banker privately and you'll hear about it. And, it isn't unique to private banks only. Public sector banks too face similar pressure but of a different kind -- from the finance ministry to push different government schemes for financial inclusion, insurance cover -- PMJDY, PMJJBY, et al.

Was that pressure absent under (then HDFC Bank CEO and MD Aditya) Puri? No, of course it existed then too -- but I think he managed it better, kept his eyes and ears more open.

The pressure itself hasn't changed; how well it's supervised has. And his aura and stature were something which held the team together.

Money paid out, disguised as advertising or sponsorship rather than accounted for properly, to help mobilise deposits. Why did that happen? It's a violation of RBI norms as you're artificially showing a lower NIM (because of the cost of fund is actually higher) and you're not offering the same return to the depositors for the same amount and same tenure on a given day (which is the norm).

Why did the bank do this? The pressure to hit liability targets in an intensely competitive market. I'm not defending the (HDFC) bank. But when you have cracks in three places at once -- the sales pressure on the ground, a board and CEO not fully aligned, and a senior team that isn't pulling together -- that's when these things surface.

Was the Dubai episode part of that same pressure, and what broader lesson does it hold for HDFC Bank?

As I understand it, that was a case where a product was sold without properly establishing whether the buyer's profile -- income, net worth, that sort of detail -- actually supported the sale. Under the local regulation, it was a must.

Calling it a technical lapse doesn't make it any less of a violation; it is one, and some of the affected clients have gone to court over it. Should it have happened? No. But why did it happen?

Again, it traces back to pressure -- in this case, fee income. If your senior management isn't in sync, supervision develops cracks, and this is what falls through them.

Remember also the scale involved. HDFC Bank has long been a favourite of investors -- immediately after the merger with HDFC, it briefly ranked among top five most valuable banks in the world by market capitalisation. Now, it has slipped.

When you're that large and that visible, the spotlight is inevitably harsher. A smaller bank going through the same troubles simply wouldn't attract this much attention. But the returns have been negative for about five years now, and that scale means every misstep gets magnified.

'It was too big a merger'

Having followed HDFC Bank more closely than most observers, through two detailed books, how do you read this moment?
Is it simply a difficult transition for an institution trying to match its own extraordinary past, or a genuine reckoning about leadership and governance?

I think it's both. Succeeding Puri was never going to be an easy assignment for anyone, not Jagdishan alone -- Puri had created the bank and taken it to a level and whoever followed him was always going to be measured against that.

What happened should not have happened, and it could certainly have been handled better. Finding that three senior executives had done things they shouldn't have, and fining them Rs 1 lakh each -- that's a token amount, but it sends an unmistakable signal that something wasn't right.

Under the Banking Regulation Act, the RBI routinely penalises banks; but a bank fining its own top executives is rare, and it tells you these things weren't handled internally the way they should have been.

I'd also flag off one thing: The stock's non-performance over the past five years has almost nothing to do with corporate governance as such -- it wasn't in the headlines for that until mid-March, when the former chairman (Atanu Chakraborty)'s exit letter became public.

Until then, the decline was purely about performance -- the merger's value accretion simply wasn't happening and the bank was struggling with it.

Why? It was too big a merger. And, probably the lack of cohesiveness at the top tier, including the dynamics between the MD and the past Chairman also contributed to this.

Who do you think will succeed Sashidhar Jagdishan?

I wish I knew the answer. There's been talk of a retired public sector banking veteran, being in the reckoning and, of course, a few from the private sector.

From within the bank, there's Kaizad Bharucha, deputy managing director, but he cannot get a three year tenure as the RBI caps the tenure of a wholetime director at 15 years. Will the board recommend him and the RBI approve a less than three year term for him? Or, will the new MD come from outside? Let's wait.

I wouldn't call it a done deal publicly, but there's often a lag between what's decided and what becomes public knowledge. That lag has been visible through this entire saga; frankly, the media -- myself included -- has often been slow to catch up with what was already being worked out internally. It isn't straightforward, and there are several moving parts still to play out.

'I am not assigning blame to either side. But the chairman left saying...'

If you were to write a third book on HDFC Bank five years from now, what would its central theme be?

(Laughs) Oh dear. Yes -- if you ask me, there's certainly enough material for a third book, and I think it could be even more interesting than the first two. If I were to write it, the central theme would be the boardroom drama -- the tension, as it's now perceived from outside.

With focus on the NRC meetings which they renamed as GNRC; it's a committee of the board -- Nomination and Remuneration Committee renamed as Governance, Nomination and Remuneration Committee. I am not assigning blame to either side.

But the chairman left saying he wasn't in alignment with certain calls the bank was making, and that wasn't a sudden rupture -- it had clearly been simmering.

That tension between the board leadership and the executive management, I think, is the real story still waiting to be told.