RBI’s one-year extension for IndusInd Bank CEO raises concerns over governance: Analysts, ET BFSI

Analysts have raised considerations over the Reserve Financial institution of India’s (RBI) resolution to increase IndusInd Bank CEO Sumant Kathpalia‘s tenure by only one 12 months. This transfer might heighten worries concerning the financial institution’s governance and asset high quality, doubtlessly triggering unfavourable long-term market reactions, just like the decline noticed in 2023 when Kathpalia’s time period was prolonged by solely two years.

Pranav Gundlapalle, head of India Financials at Bernstein, acknowledged, “This can improve considerations over governance and different points with the financial institution, probably resulting in a pointy unfavourable response. The inventory is unlikely to see any rerating till a CEO with a three-year time period is appointed.”

Macquarie Capital speculated that Kathpalia might select to step down, or the financial institution would possibly appoint a public sector CEO.

Suresh Ganapathy, affiliate director at Macquarie Capital, stated, “This creates an unsure setting within the close to to medium time period. The IndusInd Bank CEO might determine to retire early given the sub-optimal tenure approval, or a brand new CEO could possibly be appointed after his one-year time period, probably a PSU banker.”

Although there was a precedent in Federal Financial institution, the place former CEO Shyam Srinivasan acquired a three-year extension after finishing a one-year time period.

Ganapathy additionally expressed uncertainty over why Kathpalia didn’t obtain a full three-year extension, particularly since different CEOs at banks like AU Financial institution, Metropolis Union Financial institution, HDFC Financial institution, ICICI Financial institution, and RBL Financial institution had been granted such extensions.

“On this context, this extension can be seen as sub-optimal,” Ganapathy added.

Macquarie additionally identified that after the appointment of PSU bankers as CEOs at Bandhan Financial institution and RBL Financial institution, the shares skilled a structural de-rating and have continued to commerce beneath one-time price-to-book ratios. Macquarie attributes the de-rating to asset high quality points and suggests an analogous end result if a PSU banker is appointed as CEO at IndusInd Financial institution.

Nitin Aggarwal, a financial institution analyst at Motilal Oswal, commented, “A one-year time period will preserve uncertainties surrounding the financial institution’s management transition. Nonetheless, it offers the financial institution with ample time to stabilize operations, handle administration succession, and resolve regulatory gaps in a deliberate method.”

IndusInd Financial institution introduced final week that the RBI had authorized a one-year extension for Sumant Kathpalia’s reappointment as CEO. Kathpalia’s time period, initially set to finish on March 24, 2025, will now conclude on March 23, 2026.

The financial institution’s board had initially authorized a three-year time period for Kathpalia in September 2024. Nonetheless, that is the second occasion by which the RBI has granted a shorter tenure than proposed by the board. In March 2023, the RBI had authorized a two-year time period as a substitute of the three years beneficial by the financial institution.

IndusInd Financial institution has skilled a muted efficiency in latest quarters, marked by a decline in internet curiosity margin, slower mortgage progress, and worsening asset high quality on account of microfinance stress. These elements have contributed to a 40% drop within the financial institution’s inventory value this fiscal 12 months.