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RBI action against RBL Bank: What we know so far

Such actions from the regulator, on a Christmas Day no less, normally don’t happen without a strong reason

December 26, 2021 / 03:14 PM IST

RBL Bank, the 78-year-old Mumbai-headquartered lender, had an unusually hectic Christmas Day, albeit minus the festivities. Two key developments came to public light during the day.

First, the Reserve Bank of India (RBI) appointed Yogesh Dayal, the chief general manager in-charge of department of communication, as an additional director on the board of the bank. Second, later in the day, the bank communicated to the exchanges that RBL Bank’s long-term MD and CEO Vishwavir Ahuja, a veteran banker, has gone on leave with immediate effect.

Subsequently, Executive Director Rajeev Ahuja was named the interim MD and CEO of the bank subject to regulatory approvals.

What could have led to the two actions? Both the bank and the regulator didn’t give any reason so far. But, one need to read between the lines, for an answer.

While we don’t have material information as to the reason, experience in other banks show this series of changes can’t be a mere coincidence. The regulator typically puts its folks on the board when it feels that there is a need for closer scrutiny either in terms of financial performance or governance issues or both.

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To be sure, we don’t know what happened in RBL Bank yet. But industry veterans point out two likely scenarios why RBI could have acted in this manner and the CEO was sent or went on leave.

“Either the regulator must have felt that the bank was not conforming to disclosures as per the regulation or there can be an issue of personal integrity—something being done wrong repeatedly. Fact is that we don’t know which is what at this point,” said a veteran banker, refusing to be named.

Remember, earlier this year, RBL had sought approval from the Reserve Bank of India (RBI) to appoint Ahuja for another three-year term at the bank’s helm. The regulator, however, had allowed RBL to extend his term by one year starting June 30, 2021.

Before RBL, Ahuja was the MD and CEO of Bank of America in India from 2001 to 2009. This shows that the RBI has been cautious.

A top official of a rating agency said there will be a review of the bank’s rating in the light of the latest developments. “We were stable in terms of rating and outlook. But now we will do a review,” said the official, who too declined to be identified.

Is asset quality a concern? “Possible,” said the banker quoted above. RBL Bank’s profits were impacted in the second quarter significantly due to higher provisions. Both the gross non-performing assets (NPA) and net NPA ratio slipped in Q2.

The gross non-performing assets (Gross NPA), net non-performing assets (Net NPA) ratios rose by 41bps/13bps (one basis point is one hundredth of a percentage point) on-quarter to 5.4 per cent/2.14 per cent. In Q2 of FY21, the Gross NPA and Net NPAs stood at 3.34 per cent and 1.38 per cent.

“But, merely because the NPA is high, the RBI is unlikely to get alerted in such a manner,” the banker argued.

RBL Bank may be paying the price for the initial phase of aggressive growth, said a senior banking analyst on condition of anonymity. “The RBI normally takes a gradual approach in such cases so as not to panic retail investors. I expect more developments ahead,” the analyst said, asking not to be named.

In the past, there have been instances where the RBI has put its people on the banks’ boards. Some of these cases include Dhanlaxmi Bank, erstwhile Lakshmi Vilas Bank, and YES Bank. The common thread in all these cases was that there were governance concerns or troubled finances.

To calm investors, RBL Bank has informed the exchanges that business is as usual at the bank. RBL also told the stock exchanges that its business and financial trajectory continues to be on improving trend.

“The financials of the bank remain robust with a healthy capital adequacy of 16.3 percent, high levels of liquidity as reflected through liquidity coverage ratio of 155 percent, stable net NPA of 2.14 percent, credit deposit ratio of 74.1 percent and leverage ratio of 10 percent, for the quarter ended September 30, 2021,” the bank said.

Yet, trade unions have sounded caution. “We are worried and concerned about the developments that are taking place in the affairs of RBL Bank Ltd, the Kolhapur-based private Bank,” the All India Bank Employees Association (AIBEA) said in a letter to Finance Minister Nirmala Sitharaman.

“The sequence of events leading to the sudden exit of Mr. Vishwavir Ahuja along with the induction of Dayal from the RBI on the Board as additional member indicates that everything is not ok with the bank,” the letter said.

It is too early to conclude what might have triggered the RBI action and the CEO abruptly going on leave. One needs to wait and watch for more clarity. But it is very likely that one will see more developments in the bank in the coming days.
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
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