Auto loan controversy in HDFC Bank could haunt Aditya Puri’s successor

But some recent controversies in the bank has made the job difficult for Puri’s successor. The problem at hand for the new chief is not just to carry on with HDFC Bank’s performance legacy but also clear doubts in the minds of investors and shareholders that there isn’t anything rotting beneath the glossy walls of the bank. HDFC Bank was rocked recently by charges of misselling or forced selling of GPS products to the auto loan borrowers.

The incident does not amount to a banking fraud or a scam. A series of exits from the senior management including the now-controversial exit of bank’s former auto division head, Ashok Khanna, could be termed as perfectly normal as the bank’s crisis management team has been attempting to portray since Day One.

But no doubt, these controversies have dented the image of HDFC Bank among common investors. The shadow of suspicion persists.

The charges include bank’s executives forcing the borrowers to buy GPS devices bundled with the auto loans and even insisting that loans will not be sanctioned unless they buy these devices.

The devices, manufactured by a Mumbai firm, Trackpoint GPS, cost about Rs 18 000 a piece. But it is not the amount involved but the corporate practices that have been questioned.

For an institution of HDFC Bank’s stature, such irregularities do not augur well. Misselling or forced selling of products is a crime in the eyes of the banking regulator and selling a non-financial product by the bank, if indeed happened, is a sin.

The allegations first surfaced on social media. The bank responded to the charges with the statement only after a sustained social media campaign by one of the whistleblowers against the alleged irregularities and subsequent reports in the mainstream media.

The misconduct by the bank officials was acknowledged by Puri itself in the bank’s AGM when he said an internal probe was conducted against a few erring employees and appropriate action was taken.

With this, the GPS scam was no longer a social media buzz and a trading room chatter but acknowledgement by India’s largest private banking institution that some of its employees went against rules possibly under the watch of a senior vertical head. Soon, reports emerged that the bank has sacked six officials in connection with the case and that the RBI has sought details of the probe.

Does the issue end there? One can’t say for sure unless the details of the probe and findings are revealed in the public. To be sure, misselling of products isn’t new in the Indian banking industry.

From insurance products to mutual funds to controversial additional tier 1 bonds (AT1 bonds), misselling has been a worrying part of the banking business.

Banks have carried out misselling rampantly in the quest to make big money, forgetting the cardinal rules of customer fairness and fair play. Customers, especially uninformed gullible ones, fall for pep talk and marketing methods easily.

But big institutions suffer reputation damage even with smaller faults by employees and the urge to protect those erring employees complicate the wound and it takes a long time to heal.

A perfect case in hand is the heat felt by ICICI Bank’s brand following Chanda Kochhar-Videocon quid-pro-quo deal. The CEO agreed to push a Rs 3,250 crore loan to Videocon’s Dhoot so that Dhoot will invest in her husband’s company. The scandal damaged ICICI bank’s image, all because of one erring employee. The wound is still fresh.

This should be a lesson to other banks. Puri’s successor, who is waiting for RBI’s final clearance at this stage, has an immediate task of making the full details of the auto loan probe public and regain the confidence of investors—both critical for the bank particularly in an already challenging industry environment.

Until then, the bank hasn’t revealed what really went wrong in the department. All that the outsider has is media reports and allegations.

The next task would be to keep the top management together. Puri enjoyed an unquestionable command over the senior management, something he built over decades.

HDFC Bank insiders and banking industry officials say Puri’s voice always dominated the management in crucial decisions. Those who didn’t heed had to leave even after long years of work in the bank.

It is not uncommon that an exodus of the senior management begins once the term of the old, influential CEO comes to an end. This happened in Yes Bank and many other banks. The new boss will have to convince the team that he is worthy to lead the team.

The whole transition process takes a while. The problem for Puri’s successor is that the change of guard is happening at a time when the banking industry is fighting the spectre of Covid-19.

There have been several senior-level exits from the bank sine FY17, many of whom were part of the bank for over a decade and contributed significantly in building the brand. A recent ambit capital research counted eighteen senior-level exits since FY17. These include Groups heads like Munish Mittal, Ashok Khanna, Abhay Aima, Nitin Chaugh, Rajesh Kumar Rathanchand, all of whom spent 18-25 years in the bank.

The list also includes Paresh Sukthankar, Deputy Managing Director, who was rumoured to be Puri’s successor at one point. These many senior-level exits mean the new CEO will also have a new team and those who built the HDFC bank legacy over the last two decades won’t be around. That’s a key challenge.

Future is built on assumptions and hopes.

The auto loan episode has damaged HDFC Bank’s image of being an institution that can’t err. It has exposed faultlines in monitoring wrongdoers and guards good corporate governance practices. A major clean-up will be one of the first big tasks of the new CEO.