Why did RBI appoint A K Singh on Bandhan Bank’s Board?

Bandhan Bank | CMP: Rs XX | Shares tumbled 4 percent after the Reserve Bank of India (RBI) appointed an additional director on the Board of the Kolkata-based lender, ahead of Bandhan Bank chief Chandra Shekhar Ghosh's retirement on July 9, 2024.

On June 24, the Reserve Bank of India (RBI) appointed an additional director on the Board of Kolkata-based Bandhan Bank. A former chief general manager with the central bank,  60-year old Arun Kumar Singh, will be on the Board for a period of one year from now, joining the existing 14-member team that includes outgoing managing director and chief executive officer Chandra Shekhar Ghosh.

Let’s understand this action a little deeper.

In the case of Bandhan, the RBI has appointed a director on the Board under Section 36AB of the Banking Regulation Act, 1949. This section allows RBI to appoint a director on the Board of any bank if the central bank is of the opinion that this is needed in the interests of the banking company or its depositors. This is typically a precautionary measure wherever the regulator feels discomfort. In the past too, the RBI has appointed directors in private sector banks wherever it sensed trouble. These include Yes Bank, Dhanlaxmi Bank and RBL Bank Ltd, among others.

In other words, the central bank typically places a director on the board of a private bank when it senses troubles in the bank’s operations and wants to know what is happening in  board meetings. In the case of Bandhan, the RBI appointing a director on Bandhan’s Board coincides with the exit of the founder, CEO Ghosh, who is set to retire on July 9.

It is critical to note that Bandhan Bank is presently facing a closer look from the regulator on multiple fronts.

Ghosh resigned despite the Board approving the re-appointment on November 24, 2023 for a period of three years. Although Ghosh said that his decision was voluntary, the central bank has multiple concerns with the operations of the bank including the Ghosh family involvement in other businesses including real estate, according to a person familiar with the development who spoke on condition of anonymity.

A detailed email questionnaire sent to Bandhan Bank seeking response on this matter remained unanswered till the time of filing this copy.

Secondly, the quality of the bank’s microloan book is under close scrutiny and there are concerns on evergreening of loans. A forensic audit is currently on by the National Credit Guarantee Trustee Company (NCGTC) of Rs 20,800 crore of microloan portfolio of the bank to ascertain alleged cases of evergreening and creation of fictitious accounts to claim insurance. Bandhan Bank on February 12 said it is confident that its claims from the credit guarantee fund for micro units (CGFMU) will be settled favourably, even as the forensic NCGTC audit was on.

The lender had taken insurance for a portfolio of Rs 20,800 crore under the CGFMU scheme and disbursed over Rs 1,950 crore under the Emergency Credit Line Guarantee Scheme (ECLGS) in FY 2020-21. It is learned that the forensic audit is almost over. But the report is yet to be submitted to the board. Clarity will emerge on the quality of the CGFMU book only after the submission of the report.

Third, according to a person familiar with the development, the search for a new CEO is taking more time than expected as the regulator wants to make sure that the new person is not connected to the past developments , which effectively rules out an internal candidate.  On April 19, Moneycontrol had  exclusively reported that the bank  appointed headhunting firm Egon Zehnder to search for candidates for the CEO post. The agency is reviewing potential names and is likely to submit its short list to the bank’s board in the next few weeks.

The bank doesn’t have internal candidates who can pass the central bank’s smell test for the CEO post. Bandhan Bank has two executive directors, Rajinder Babbar and Ratan Kesh. Babbar has been on the board for barely two months, while Kesh has little over one year of experience on the board. The RBI will be more comfortable to hand over the baton to a more experienced candidate.

“The RBI wants to keep a close watch on the Board during Ghosh’s transition period and wants a director to directly report from the Board,” said the person quoted above.

To sum up, the central bank’s action affirms that the regulator is not too happy with the recent developments at the bank and, more importantly, doesn’t want to take any chances on depositor protection.