At great expense

Growing instances of ‘operational misconduct’ among top private sector banks is a matter of serious concern for the Indian public

After ICICI Bank and YES Bank, it is now HDFC Bank to feature in the operational misconduct involving the biggest ever outstanding loan under a single function. HDFC Bank, the country's most valued bank, faces the charge of operational misconduct by its vehicle financing unit carrying outstanding loans of over Rs 1.2 trillion (USD 16 billion) as of June 30, 2020. Surprisingly, little is known to the public about the nature and extent of the 'misconduct' or fraud and their impact on the bank's books. Instead, the news around the bank is focussing on the change of guards at the top with Aditya Puri set to step down after 26 years at the helm. Puri will retire when he turns 70 in October under RBI rules. Sashidhar Jagdishan will be HDFC Bank's next MD cum CEO. Interestingly, Puri offloaded nearly all his stake in HDFC Bank three months before his term ends. The banker sold 74.2 lakh shares or 0.13 per cent stake for a total of Rs 842.8 crore between July 21-23, insider trading disclosures on the BSE website showed. The level of 'operational misconduct' at HDFC Bank nearly eclipse top-level frauds at the two other hi-profile private sector institutions — ICICI Bank and Yes Bank.

Considering HDFC Bank's market image, stakeholders expected the bank provide a detailed report on the 'operational misconduct' by the functional management and why the tenure of the vehicle financing unit head, Ashok Khanna, was repeatedly extended after the normal retirement age. In fact, HDFC Bank's management had even reportedly discussed a proposal for Khanna to stay on for six more months until October, to ensure continuity ahead of the retirement of longstanding MD Aditya Puri. The bank did conduct a probe into allegations of improper lending practices and conflicts of interests in its vehicle-financing operation involving Ashok Khanna. Following this, Khanna's extended term was not further renewed. He retired at the end of March in line with his contract. The question is: if Khanna's misconduct was established why did the bank management let him go so easily. Why was the result of the bank's probe not made public? The investigation was believed to have followed issues thrown up by an internal audit of the bank's vehicle-dealer lending, as well as allegations of conflicts of interest in the purchase of global positioning systems for vehicles financed by the bank. Obviously, the grievous nature of the 'operational misconduct' must have continued for years. How is that the bank's top management remained oblivious to it for such a long time?

The Reserve Bank of India is believed to have asked HDFC Bank to provide details of its internal investigation into allegations of improper lending practices in its vehicle-financing operation. Reportedly, RBI also sought information on steps taken by the bank to remedy those issues identified during the investigation. The HDFC Bank managing director merely said during the investor call which followed the bank's latest earnings report that the inquiry was triggered by a whistle-blower and uncovered "personal misconduct" by some of the bank's employees. "Based on internal inquiry findings, appropriate action was taken against a set of employees in the auto loan business segment for their act of personal misconduct." When the business segment's outstanding loans total such a massive amount as over Rs 1.2 trillion, one expected the bank management to be more specific about the nature of the 'misconduct' and if it will substantially impact the bank's non-performing assets (NPAs). Considering the sheer worth of HDFC Bank, neither RBI nor the Government should take the matter lightly. An independent investigation will be most desirable in the long term interest of the bank and the financial influence it has on the market and society. The fact is that the total market capitalisation (m-cap) of all Government-owned banks, including SBI, combined is less than half the HDFC Bank's value.

The 'improper lending practices' in HDFC Bank's vehicle-financing operation also open up the questions of how private sector banks are running their business, the growing top-level corruption in the management and how the latter try to hide the evil. Former ICICI Bank chairperson Chanda Kochhar and the bank board tried to fight until the charges against her 'conflict of interest' and 'operational misconduct' allegations came in the open. Finally, the bank board itself sought to act against her to save the reputation of the country's third-largest lender. Independent official investigator CBI booked Chanda Kochhar on charges of criminal conspiracy, cheating and abuse of official position for "dishonestly sanctioning loans to the Videocon Group". The CBI's FIR alleged that she was receiving "illegal gratification through her husband, Deepak Kochhar, from Videocon MD VN Dhoot for sanctioning a term loan of Rs 300 crore to Videocon International Electronics Ltd". ICICI Bank said in a statement it would seek to revoke Kochhar's unpaid bonuses or increments, unexercised stock options and medical benefits. The ICICI board also planned to "clawback" all bonuses paid to Kochhar between April 2009 until March 2018.

In the case of the more recent operational fraud at YES Bank, CBI, the independent official investigator, charged the bank's co-founder Rana Kapoor and 11 others with criminal conspiracy. CBI registered a case for alleged cheating, fraud, criminal conspiracy in sanctioning of loans by YES Bank in exchange of kickbacks by Kapoor from DHFL promoter Dheeraj and Kapil Wadhawan. CBI in its FIR mentioned that the scam started taking shape between April and June 2018 when Yes Bank invested Rs 3,700 crore in short-term debentures of the debt-laden DHFL. In return, the Wadhawans allegedly paid kickbacks of Rs 600 crore to Rana Kapoor and his family members in the form of loans to DoIT Urban Ventures. The Enforcement Directorate charge sheet highlighted Kapoor's alleged illegal gratification amounting Rs 5,050 crore. Along with several irregularities in distributing bank loans to corporate entities, by misusing his official position, creating shell companies for laundering money, defaults, and creating tainted assets. The ED complaint named his wife Bindu, three daughters — Rakhee, Roshini and Radha— and three firms, Morgan Credits, RAB Enterprises (India), and Doit Urban Ventures, allegedly controlled by them. The growing 'operational misconduct' in private sector banks is a matter of serious public concern.

Views expressed are personal

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