Banking Sector Needs Overhaul: HDFC's Ex-Chairman Chakraborty

Speaking at The Secretariat podcast hosted by J.N. Singh, former Chief Secretary of Gujarat, Chakraborty threw up important observations on the Indian banking system.

To begin with, he said, regulations prescribed by the RBI need to move away from being overtly prescriptive, something that is pushing up costs as well as regulatory hurdles. Enhancing autonomy of the Indian banks is also the need of the hour. 

According to the former chairman of the country’s largest private sector lender in terms of market capitalisation, bank boards need to be allowed to function more freely.  

Chakraborty pointed out that the salaries of even a whole-time director of a bank need to be approved by the RBI. “Why have a board if they are not allowed to operate freely? We then don’t need a board,” Chakraborty said, adding that fixing the tenure of bank chiefs, especially for the private sector is equally important.

“That needs to get reduced to more rule-based, principle-based regulation, banks need to be allowed to function more freely, they need to be able to take some risks without any fear,” he said.

A Governance Issue

Chakraborty, a 1985 batch IAS officer who also served as Economic Affairs Secretary, also threw light on the governance issue. While RBI is the regulator, it also has its nominees on public sector bank boards. “You're wasting resources. And also introducing some amount of conflict,” he said.

Chakraborty joined HDFC Bank as Part-time Chairman in 2021. But his sudden resignation put the spotlight on HDFC and came as a wake-up call for regulators and government authorities. "It is not just the bank, but it is time to do a thorough scrutiny and checking of listed entities," an advisor to a consultancy firm had earlier told The Secretariat.

“Certain happenings and practices within the bank, that I have observed over the last two years, are not in congruence with my personal Values and Ethics,” Chakraborty wrote in his resignation letter.

The bank has been caught in a massive ₹45 crore controversy. According to reports, the bank assured a much higher return to the Maharashtra State Road Development Corporation (MSRDC) on a large deposit. Since RBI regulations restrict lenders from negotiating interest rate payouts. The additional payouts were allegedly camouflaged as marketing spends.  

However, Chakraborty also said that the merger of the HDFC Bank was “the best thing” to have happened.

“It improved the asset side of the bank, where now it has mortgage, which is about 30% of the total asset side, and they are perhaps today the largest lenders on the housing side,” he said.

He underlined that he enjoyed his stint at the bank, especially overseeing the merger process.