ICICI too big to fail, but Chanda Kochhar?

Rating agency Fitch said in its report on ICICI Bank recently that investigations over allegations regarding loans extended to Videocon Group raises questions over the bank’s governance and creates reputational risks. DH file photo

The Indian banking system is going through a crisis of confidence and this crisis seems to have spread from public sector banks to private sector banks. It is visible in Punjab National Bank reporting a humongous fraud, Axis Bank CEO Shikha Sharma announcing that she wants to step down in December this year, and in the reputation risk that ICICI Bank is exposed to over loans granted to Videocon Group.

Rating agency Fitch said in its report on ICICI Bank recently that investigations over allegations regarding loans extended to Videocon Group raises questions over the bank’s governance and creates reputational risks.

Fitch also said that the presence of the bank’s CEO and Managing Director Chanda Kochhar on this credit committee — and the bank’s reluctance to support an independent probe – has, in its opinion, created doubts over the strength of its corporate governance practices.

The allegations made by an investor relate to “wrongful gains” made by Chanda Kochhar’s husband Deepak Kochhar when loans were sanctioned by ICICI Bank to Videocon Group whose promoter Venugopal Dhoot had collaborated with Deepak Kochhar in NuPower Renewables Private Limited. The Rs 3,250-crore loan has subsequently become a non-performing asset (NPA), though the ICICI Bank board has claimed that it was the credit committee of the bank which sanctioned the loan as part of a consortium.

The report also said that the investigation could undermine investor confidence in the bank, with inherent implications for funding costs and liquidity, and that there is a potential risk of financial penalties as well as legal action. While board members have been defending Chanda Kochhar, the allegations have caused collateral damage, with the bank losing nearly 20% of its market capitalisation.

If it was a case of operational risk for PNB in the Nirav Modi case, it is more a case of reputation risk in ICICI Bank’s case. Unlike the huge loss that PNB is likely to incur, ICICI Bank may not incur a loss of more than Rs 3,250 crore.

The loan is unlikely to significantly undermine ICICI’s financial profile, it being one of the three “domestic systemically important banks (D-SIB)” — the other two being State Bank of India and HDFC Bank. In particular, its core capitalisation will remain strong even if the loan were completely written off.

Questions over governance

Against the backdrop of all these allegations of conflict of interest and questions over standards of corporate governance, the question that needs to be asked is — should Chanda Kocchar resign? Was the board/credit committee aware while sanctioning the loans to Videocon that Venugopal Dhoot had business interests with the husband of Chanda Kochhar? And did Chanda Kochhar herself disclose this fact to the board, that her husband had dealings with Dhoot? Why are the board directors falling head over heels to support Chanda Kochhar? On the other hand, the board has been reluctant to order an independent probe until now. She may be innocent, but propriety demands that Chanda Kochhar resign or recuse herself till a probe is conducted.

The other question is, will the bank fail? Will this saga lead to a collapse of the bank itself? The answer is, it’s very unlikely as RBI declared it a D-SIB in August 2016 –- that is, it is too big to fail. The Reserve Bank had issued the framework for dealing with D-SIBs on July 22, 2014. To recap, the D-SIB Framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs every year in August, starting from 2015, and place these banks in appropriate buckets depending upon their Systemic Importance Scores (SIS). Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it. RBI will determine a cut-off score beyond which banks will be considered as D-SIBs. Based on their SIS in ascending order, banks will be plotted into four different buckets and will be required to have additional Common Equity Tier 1 (CET 1) capital requirement ranging from 0.2% to 0.8% of risk-weighted assets, depending upon the bucket they are in. The D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.

Based on the methodology provided in the D-SIB Framework and data collected from banks as on March 31, 2015 and March 31, 2016 respectively, the Reserve Bank had announced State Bank of India and ICICI Bank Ltd as D-SIBs on August 31, 2015 and August 25, 2016 respectively. Subsequently, in September 2017, RBI had identified HDFC Bank also as a D-SIB. So, it’s unlikely that ICICI Bank will fail, and it is even more unlikely that there will be any major shock to the financial system. ICICI Bank will shrug off this saga and move on. But what about Chanda Kochhar? Is it the end of the road for her?

(The writer is a former banker and is currently with Manipal Academy of Banking, Bengaluru)

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