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RBL Bank: Still more questions than answers

Clarifications by RBI and bank management rule out issues concerning capital and asset quality but do little to end the ambiguity about the exact reasons behind the surprise events on Christmas Day.

December 27, 2021 / 08:58 PM IST

The RBL Bank top management on Sunday evening and subsequently the Reserve Bank of India (RBI) on Monday issued clarifications to the effect that it is business as usual, seeking to allay fears of the investors and the depositors of the bank.

These actions were necessitated by the developments of December 25 when the RBI appointed an additional director on the board of the bank and the MD and CEO Vishwavir Ahuja went on leave out of the blue. Rajeev Ahuja, executive director, was named as interim CEO of RBL. While the clarifications from both Ahuja and RBI primarily emphasised on the capital position and financial stability of the bank, some vital questions remain unanswered.

Why did the RBI suddenly appoint an additional director on the RBL Board?

During the conference call, Rajeev Ahuja said he cannot speak on behalf of the RBI. On December 27, RBI said the appointment of additional directors in private banks is undertaken “as and when it is felt that the board needs closer support in regulatory/supervisory matters”.

Support? Yeah right! In regulatory argot, this means: “Folks, we are not happy with your affairs and hence need a closer look whether you like it or not.”

Close

This is what Section 36AB of the Banking Regulation Act, 1949 says: “If the Reserve Bank is of [opinion that in the interest of banking policy or in the public interest or] in the interests of the banking company or its depositors it is necessary so to do, it may, from time to time by order in writing, appoint, with effect from such date as may be specified in the order, one or more persons to hold office as additional directors of the banking company.”

In the same clarification, the RBI said RBL Bank is “well capitalised and the financial position of the bank remains satisfactory.” The RBI further said as per half yearly audited results as on September 30, 2021, the bank has maintained a comfortable Capital Adequacy Ratio of 16.33 per cent and Provision Coverage Ratio of 76.6 per cent. The Liquidity Coverage Ratio (LCR) of the bank is 153 per cent as on December 24, 2021 as against regulatory requirement of 100 per cent.

So if capital is not a worry and financial position is satisfied, what prompted the central bank to invoke Section 36AB in public interest?

Why did Vishwavir Ahuja, the MD & CEO go on leave abruptly?

There is no satisfactory explanation on why the long-time CEO Vishwavir Ahuja who has been with the bank since 2010, went on leave. Though personal reasons have been cited, there is speculation that both the bank and Ahuja was expecting a continuation of his tenure but the regulator said no.

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, allowed RBL to extend his term by one year starting June 30, 2021. Why didn’t RBI renew his term beyond one-year although, according to RBI rules, Ahuja, 59, was eligible for re-appointment at least until 2025?

 What is wrong with the bank to warrant such an action?

The RBI statement said everything about RBL Bank—capital, financial position—are kosher. More specifically, the RBI appeals that “there is no need for depositors and other stakeholders to react to the speculative reports”. If all is well with the bank, what was the need for the regulator to announce appointment of additional director on the bank’s Board?

Why didn’t Vishwavir Ahuja leave a parting note?

Ahuja, a veteran banker of 35 years, has played a crucial role in transforming the bank into a well-known name among smaller private banks. The bank’s website says: “During his tenure he has been instrumental in growing the Bank's balance sheet close to 25 times making it one of India's fastest growing private sector Banks. In August 2016, he spearheaded one of the country's most successful IPOs in recent history, commanding an over-subscription of over 70 times and a 22% listing premium over the issue price of Rs 225 per share.”

Why did the veteran banker long associated with the bank leave so abruptly without making a statement to the shareholders or customers? This would have perhaps avoided a knee-jerk reaction from investors.

The RBI decision has already impacted the share price, pushing the stock to a 52-month low. The share ended 18 percent lower at the end of the trading session on December 27, indicating that the stock market is not convinced about the clarifications from the bank or the RBI.

 If RBL finances look okay, what is the issue?

During the conference call on Sunday, RBL Bank management emphasised that there is nothing wrong with the bank’s financial position. Interim CEO Ahuja reiterated that the bank is sitting on a cash surplus of Rs 15,000 crore.

Ahuja stressed that the asset quality has improved over quarters and now looks stable. The bank is in the process of rebalancing the loan book cutting down the risky unsecured lending book.

RBI too, as mentioned above, vouched for the bank’s financial stability citing “a comfortable Capital Adequacy Ratio of 16.33 per cent, Provision Coverage Ratio of 76.6 per cent, Liquidity Coverage Ratio (LCR) of the bank is 153 per cent as on December 24, 2021 as against regulatory requirement of 100 per cent and so on.

Arguments not convincing enough for analysts

Yet, the analyst community is not convinced with the explanations.

In a note ICICI Securities said uncertainty looms at RBL Bank with the RBI’s appointment of Additional Director on bank’s Board and the Board accepting  Vishwavir Ahuja’s (MD & CEO) leave for six months.

“More so, after management highlighting that these developments are not in any manner a reflection on business fundamentals or strategy of the Bank,” said ICICI Securities in the note.

Further, repercussion of this move on various stakeholders (including depositors, employees, etc) and consequent derailment of confidence and disruption would be key monitorable going forward, the note added.

In another note, Emkay analysts said management did not provide satisfactory reasons for the RBI's appointment of its official as an additional director on the bank's board and the sudden management rejig.

“We believe, in order to comfort investors, more explanation will be required from management to justify the sudden exit of Mr Vishwavir Ahuja nearly six months before his term ends and the RBI's intervention (typically seen in weak banks like Ujjivan, Dhanlaxmi, LVB, J&K Bank). We believe the story will unfold in due course,” the Emkay note said.

To sum up, prima facie, these clarifications rule out issue concerning capital and asset quality but still leaves question on the exact reasons behind the surprise events on the Christmas Day. The clarifications from the bank management and the RBI aren’t convincing enough to understand the real reasons behind the sequence of events. They only give room to more questions than answers.
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.
Tags: #RBL Bank
first published: Dec 27, 2021 08:32 pm
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