What does it mean when the Reserve Bank of India cuts short the tenure of a bank CEO after the board has recommended a longer extension? Is this the regulator’s way of telling the board that it does not find the CEO’s performance up to mark and that he/she needs to shape up or ship out?

The issue of tenure extension for chiefs of private sector banks has come into sharp focus after the RBI granted only a year’s extension to Sumant Kathpalia, MD and CEO of IndusInd Bank (IIB), against the three recommended by the bank’s board.

The RBI’s overruling of board-recommended tenure extensions appears to be bothering several top private sector bankers whose terms are up for renewal.

“The scenario is saddening. He (Kathpalia) was given a one-year extension this time weeks before his tenure ends. Earlier, he was given a two-year extension. The regulator assesses all data points and processes before approving a new tenure for bank heads, but mentally we are on edge during the reappointment period,” said a top official at a private bank.

The RBI has asked IIB to submit names of external candidates who can potentially succeed the incumbent CEO.

According to six senior bankers businessline spoke with — including two bank chiefs — corporate governance and financial performance top the RBI’s checklist when deciding the fate of bank CEOs.

Looming uncertainty

Kathpalia’s case is only the most recent instance of the RBI curtailing a longer extension proffered by a bank board.

IIB’s recent disclosure of discrepancies in its derivative portfolio, which could lead to an adverse ₹1,530-crore impact on its net worth, may have influenced the RBI’s decision on the bank chief’s tenure.

But the bank’s recent earnings have been under pressure due to a broader stress in the micro loan segment, where it has heavy exposure.

Thankfully for investors, Kathpalia has said the lender will likely report a net profit in Q4FY25 despite absorbing the one-time impact on the balance sheet.

In April last year, Bandhan Bank founder and former MD and CEO Chandra Shekhar Ghosh had said he would retire from his position at the end of his third consecutive tenure, on July 9. This surprised the markets as the bank’s board had, in November 2023, approved the reappointment of Ghosh as MD and CEO for three years.

Bandhan Bank had appointed Ratan Kesh as interim CEO after Ghosh’s retirement, and subsequently it secured the RBI’s nod for appointing an external candidate, former Indian Overseas Bank chief Partha Pratim Sengupta, as CEO for three years.

During Ghosh’s tenure, a government agency was appointed to audit loan claims filed by the bank under a credit guarantee scheme.

Former RBL Bank CEO Vishwavir Ahuja, YES Bank’s Rana Kapoor, Shikha Sharma of Axis Bank, and Chanda Kochhar of ICICI Bank also faced adverse actions by the regulator, which cut short their tenures.

RBI’s yardstick

According to a former bank chief, lenders are asked to submit to the RBI the names of candidates for the MD and CEO post at least six months before the incumbent’s tenure ends. This gives the regulator enough time to conduct background checks in the case of external candidates. For an incumbent CEO whose name has been recommended for a new term, the RBI checks the bank’s financial performance during the CEO’s term, the corporate governance framework, its risk mitigation strategy, and whether the individual recuses himself/ herself whenever there is a potential conflict of interest, among other factors.

“Each year the RBI approves ESOPs and salaries of MDs, CEOs, EDs and even key managerial personnel at large banks, depending on individual performance. Based on the bank’s business plan, the RBI generally gives an indicative goal sheet before the new CEO takes charge... They have a good understanding of the bank and they have the advantage of comparing the performance of the bank with similar-sized peers...” the banker said.

“The regulator also does inspections of banks every year. RBI inspectors meet with the heads of different departments, which gives them a fair idea of the bank’s core team performance and processes,” the banker added.

If a candidate has worked overseas, the RBI attempts to contact the regulator in that foreign jurisdiction for background checks.

Another source said the regulator gauges the individual’s ability to ensure compliance, take the team along on decisions, and the manner in which they lead the business. Recently, the source added, the regulator made it clear to the CEO of a private bank that their overall behaviour had to improve, and this was acted on immediately.

“You cannot run the ship in a ‘my way or the high way’ style. There are often times when the RBI has told the CEO that they must take the board along. The board is not there just to sign off things for you. Core team is meant to ask questions. Basically, it all trickles down to compliance,” the source said.

While bankers may face uncertainty in the run-up to their reappointment, any change of guard has always better served the institution.

“The RBI has more information about institutions. Bankers at the top level are sometimes unable to see the mistakes they are making,” the source said. “In Rana Kapoor’s case, while the bank was doing well financially, the core business model was not right as it chased quick profits rather than building a sustainable business model. Fee income alone cannot make the bank’s business sustainable, which the RBI expects from the bank in depositors’ interest.”

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Published on March 16, 2025