Learning the right lessons at the bank
Trust is central to the banking system. It needs to be nurtured
Two months after an investigation in this paper revealed that HDFC Bank had camouflaged crores as marketing spend to pay higher interest to the Maharashtra State Road Development Corporation, the bank’s board has initiated action. It has issued warning letters and imposed a penalty of Rs 1 lakh on three high-ranking officials — the managing director and chief executive officer, chief financial officer, and group head of retail assets. The action is unprecedented, and the board under a new chairman may be sending a signal down the line. But the saga raises troubling questions of corporate governance at the country’s largest private bank.
On March 12, HDFC’s audit committee of the board had ordered an “internal vigilance investigation” into the Rs 45 crore paid to the corporation during 2023-24 and 2024-25. Earlier, an internal audit of the bank’s marketing division for 2024-25 had marked out these payments, while rating the division’s performance as “unsatisfactory”. The investigation revealed this amount was the interest paid over the specified interest rate on deposits. While there is fierce competition among banks to attract deposits, the RBI’s master directions on interest rates do not allow for rates to be negotiated between the parties. This “differential interest” was not routed directly into the corporation’s account as interest earned, but was channelled through the bank’s marketing department, dressed up as contribution to awareness campaigns. On March 18, six days after the probe was ordered, the bank’s then chairman, Atanu Chakraborty resigned, saying that “certain happenings and practices within the bank” were not in “congruence” with his personal values and ethics.
Given the seriousness of the matter, some questions must be asked. After this paper’s investigation two months ago, in a note to stock exchanges the bank claimed that the “internal controls at the bank are robust”. Its latest statement speaks of two such deposits, the earlier one is of 2017. Could there have been more such instances, flagged by internal audits and ignored by the board? Shouldn’t the board review the audits of at least the last five years? This will ensure that the right lessons are learnt from this episode. The question also is whether or not oversight processes will be effective. Trust is central to the banking system. It needs to be nurtured. For that, all appropriate steps should be taken urgently.
