Specialist in Indian Banking and Economic Research

Hemindra Hazari

The Reserve Bank of India (RBI)’s decision to grant a 1-year <a href="https://ir.rblbank.com/pdfs/regulatory/ReappointmentofMDCEOMrVishwavirAhujaFinal2021.pdf" target="_blank" rel="noopener">extension</a> to  Vishwavir Ahuja, Chief Executive Officer (CEO), <a href="https://www.smartkarma.com/entities/rbl-bank-ltd" target="_blank" data-smartkarma-citation="entities:22856:1" rel="noopener">RBL Bank Ltd (RBK IN)</a> is similar to the 1-year extensions it provided to <a href="https://www.dcbbank.com/pdfs/BSENSEReAppointmentOfMDANDCEOApril2021.pdf" target="_blank" rel="noopener">Murali Natarajan</a>, CEO, <a href="https://www.smartkarma.com/entities/dcb-bank-ltd" target="_blank" data-smartkarma-citation="entities:1557:1" rel="noopener">Dcb Bank Ltd (DCBB IN)</a> and <a href="https://www.bseindia.com/xml-data/corpfiling/AttachHis/d8768272-3bd1-4d07-808b-43b725fcdc69.pdf" target="_blank" rel="noopener">Shyam Srinivasan</a>, CEO <a href="https://www.smartkarma.com/entities/federal-bank-ltd" target="_blank" data-smartkarma-citation="entities:11784:1" rel="noopener">Federal Bank (FB IN)</a>. In recent times, Udak Kotak, CEO-founder, <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a>(KMB) enjoys the unique distinction of getting a <a href="https://www.bseindia.com/xml-data/corpfiling/AttachLive/d5faa2b3-1886-42a9-af9d-960ff207a4ce.pdf" target="_blank" rel="noopener">3-year</a>  extension by the regulator, despite having been a CEO for over 15 years, contradicting RBI’s <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12078&amp;Mode=0" target="_blank" rel="noopener">policy</a>  regarding the maximum tenure for bank CEOs.There are three issues raised by RBI’s conduct. Firstly, the decision to favour Uday Kotak and KMB is plainly <a href="https://thewire.in/banking/uday-kotak-ceo-kotak-mahindra-bank-rbi" target="_blank" rel="noopener">partisan</a>, undermining the credibility of the banking regulator. Secondly, by granting three private bank CEOs only a 1-year extension, is the regulator indicating to the banks its displeasure with the existing CEOs and the need to find a replacement in the course of the year? Although the RBI granted Shyam Srinivasan a second 1-year extension last year, the Federal Bank board of directors has <a href="https://economictimes.indiatimes.com/industry/banking/finance/federal-bank-board-seeks-another-3-year-term-for-ceo/articleshow/81639243.cms?from=mdr" target="_blank" rel="noopener">sought</a>  a 3-year extension when his term ends on September 29, 2021, indicating that the bank has chosen not to read the regulator’s tea leaves – or that the RBI did not give any such indication to the bank to look for a successor. If the RBI were to approve a further term to Shyam Srinivasan, it would raise questions about the regulator’s competence; what was the justification for repeated 1-year extensions? Thirdly, RBI’s policy of renewing CEOs with 1-year tenures unnecessarily introduces uncertainty in a bank’s future strategy: the existing CEO and the bank can plan for only one year, as the RBI may insist on a replacement at the end of the year.   Such short-term planning, especially in the current environment of economic stress, can be disruptive to the bank and its stakeholders, and it is unfortunate that it is being caused by the regulator’s decision to approve only 1-year extensions, without any explanation to the public.The capital market plays an important role for private banks, and the regulator must either be more transparent in explaining its decisions or it should reconsider its policy of granting 1-year extensions even when the candidates are conforming to the regulator’s norms of age and tenure for the CEOs. It is tragic that the RBI’s credibility as an impartial regulator has reached a nadir. Latest developments -- the favoured treatment it has meted to Uday Kotak, and its inability to comprehend the significance of its decision to renew CEO tenures for only  one year -- take its credibility even lower.

The Reserve Bank of India (RBI)’s decision to grant a 1-year extension to  Vishwavir Ahuja, Chief Executive Officer (CEO), RBL Bank Ltd (RBK IN) is similar to the 1-year extensions it provided to Murali Natarajan, CEO, Dcb Bank Ltd (DCBB IN) and Shyam Srinivasan, CEO Federal Bank (FB IN). In recent times, Udak Kotak, CEO-founder, Kotak Mahindra Bank (KMB IN)(KMB) enjoys the unique distinction of getting a 3-year  extension by the regulator, despite having been a CEO for over 15 years, contradicting RBI’s policy  regarding the maximum tenure for bank CEOs.There are three issues raised by RBI’s conduct. Firstly, the decision to favour Uday Kotak and KMB is plainly partisan, undermining the credibility of the banking regulator. Secondly, by granting three private bank CEOs only a 1-year extension, is the regulator indicating to the banks its displeasure with the existing CEOs and the need to find a replacement in the course of the year? Although the RBI granted Shyam Srinivasan a second 1-year extension last year, the Federal Bank board of directors has sought  a 3-year extension when his term ends on September 29, 2021, indicating that the bank has chosen not to read the regulator’s tea leaves – or that the RBI did not give any such indication to the bank to look for a successor. If the RBI were to approve a further term to Shyam Srinivasan, it would raise questions about the regulator’s competence; what was the justification for repeated 1-year extensions? Thirdly, RBI’s policy of renewing CEOs with 1-year tenures unnecessarily introduces uncertainty in a bank’s future strategy: the existing CEO and the bank can plan for only one year, as the RBI may insist on a replacement at the end of the year.   Such short-term planning, especially in the current environment of economic stress, can be disruptive to the bank and its stakeholders, and it is unfortunate that it is being caused by the regulator’s decision to approve only 1-year extensions, without any explanation to the public.The capital market plays an important role for private banks, and the regulator must either be more transparent in explaining its decisions or it should reconsider its policy of granting 1-year extensions even when the candidates are conforming to the regulator’s norms of age and tenure for the CEOs. It is tragic that the RBI’s credibility as an impartial regulator has reached a nadir. Latest developments -- the favoured treatment it has meted to Uday Kotak, and its inability to comprehend the significance of its decision to renew CEO tenures for only  one year -- take its credibility even lower.

RBI’s 1-Year Extensions to Bank CEOs: Creating Uncertainty and Short-Termism

Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Thematic (Sector/Industry)

A couple of days ago, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> announced a co-lending partnership with a peer HFC (Housing Finance Company), <a href="https://www.smartkarma.com/entities/housing-development-finance-corporation" target="_blank" data-smartkarma-citation="entities:252:1" rel="noopener">HDFC Limited (HDFC IN)</a>. IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - <a href="https://www.smartkarma.com/insights/edelweiss-a-beneficiary-of-potentially-increased-adoption-of-co-lending-by-psbs" target="_blank" data-smartkarma-citation="insights:50237" rel="noopener">Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs</a>.

A couple of days ago, Indiabulls Housing Finance (IHFL IN) announced a co-lending partnership with a peer HFC (Housing Finance Company), HDFC Limited (HDFC IN). IHFL's promoter and MD, Gagan Banga, mentioned that IHFL is reorienting its business model completely towards being an origination and servicing platform rather than being a full-fledged lender. This announcement by IHFL, one of the top five HFCs in India, suggests that co-lending is increasingly gaining traction within the NBFC/HFC industry.
A few days ago, we had highlighted how the upcoming EASE 4.0 program is also likely to promote co-lending by PSBs and how Edelweiss could be a beneficiary of this. For more details, please refer to this - Edelweiss: A Beneficiary of Potentially Increased Adoption of Co-Lending by PSBs.

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

As we highlighted in last week’s Int’l Compass, the weight of the evidence suggests commodities are in the early stages of a new secular bull market. Global Materials remains a favorite Sector overweight and we believe outperformance is likely to continue considering the Sector’s long-term bullish RS reversal. Additionally, we are upgrading equal-weighted Energy to overweight due to bullish price and RS inflections -- add exposure with a focus on small- and mid-caps.

Global Commodity-Related Equity Sectors In Secular Bull

US law firms, Rosen Legal, Pomerantz and Schall have filed class action suits (<a href="https://www.rosenlegal.com/cases-1922.html" target="_blank" rel="noopener">here</a>,  <a href="https://pomlaw.com/recent-case-info?company=HDB" target="_blank" rel="noopener">here</a> and <a href="https://schallfirm.com/cases/hdfc-bank-limited/" target="_blank" rel="noopener">here</a>)  against <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a>. The grounds are that HDFC Bank allegedly misled investors, provided inadequate disclosures and internal controls over financial reporting, and engaged in improper lending practices in its automobile loan division, resulting in a lack of credibility of its public statements. On Twitter, and subsequently in the media, there has been a consistent barrage of information on the improper practices in its automobile loan division. HDFC Bank has officially said that certain errant individuals in the automobile loan division were held to account, but has not publicly acknowledged the role of Ashok Khanna, the former head of the division. Khanna not only reported directly to CEO Aditya Puri, but was also given repeated extensions by the board of directors after his retirement. If Khanna is found to have been involved in the malpractices, it may also expose Aditya Puri to <a href="https://legal-dictionary.thefreedictionary.com/vicarious+liability" target="_blank" rel="noopener">vicarious liability</a>.On Twitter, correspondence of HDFC Bank officials reveal that the bank was brazenly and possibly forcibly selling overpriced Global Positioning System (GPS) devices made by Trackpoint Private Ltd. under the brand name ‘Matchpoint’ to its automobile loan customers. It was part of the loan disbursement documentation. Ambitious sales targets were given to HDFC Bank staff to sell the product, and they were rewarded directly by the vendor. It remains a mystery how only a few errant officials could be held responsible when it was a product approved by the bank’s internal systems and where the bank earned a <a href="https://twitter.com/MDahariya/status/1307619778186670080?s=20" target="_blank" rel="noopener">commission</a>. This raises a major concern, as cross-selling GPS devices and forcing the product on its automobile customers is a violation of the Banking Regulation Act, 1949 which explicitly specifies what business activity a bank can undertake. While the banking regulator is also investigating this fiasco, HDFC Bank needs to publicly explain how the bank’s policies permitted the selling and earning of commission on a non-financial product packaged within its automobile loan, in apparent violation of banking law. It needs to explain how its internal audit and vigilance systems could not detect that an outside vendor was directly rewarding bank staff for selling the product. It is these policies and practices, and the lack of timely disclosures, which should cause concern among HDFC Bank stakeholders. It hardly befits India’s most valuable bank, which trades at a significant premium valuation to its peers, to have been engaged in such activity; but even more worrying is its lack of transparency once these malpractices came to light.

US law firms, Rosen Legal, Pomerantz and Schall have filed class action suits (here,  here and here)  against HDFC Bank (HDFCB IN). The grounds are that HDFC Bank allegedly misled investors, provided inadequate disclosures and internal controls over financial reporting, and engaged in improper lending practices in its automobile loan division, resulting in a lack of credibility of its public statements. On Twitter, and subsequently in the media, there has been a consistent barrage of information on the improper practices in its automobile loan division. HDFC Bank has officially said that certain errant individuals in the automobile loan division were held to account, but has not publicly acknowledged the role of Ashok Khanna, the former head of the division. Khanna not only reported directly to CEO Aditya Puri, but was also given repeated extensions by the board of directors after his retirement. If Khanna is found to have been involved in the malpractices, it may also expose Aditya Puri to vicarious liability.On Twitter, correspondence of HDFC Bank officials reveal that the bank was brazenly and possibly forcibly selling overpriced Global Positioning System (GPS) devices made by Trackpoint Private Ltd. under the brand name ‘Matchpoint’ to its automobile loan customers. It was part of the loan disbursement documentation. Ambitious sales targets were given to HDFC Bank staff to sell the product, and they were rewarded directly by the vendor. It remains a mystery how only a few errant officials could be held responsible when it was a product approved by the bank’s internal systems and where the bank earned a commission. This raises a major concern, as cross-selling GPS devices and forcing the product on its automobile customers is a violation of the Banking Regulation Act, 1949 which explicitly specifies what business activity a bank can undertake. While the banking regulator is also investigating this fiasco, HDFC Bank needs to publicly explain how the bank’s policies permitted the selling and earning of commission on a non-financial product packaged within its automobile loan, in apparent violation of banking law. It needs to explain how its internal audit and vigilance systems could not detect that an outside vendor was directly rewarding bank staff for selling the product. It is these policies and practices, and the lack of timely disclosures, which should cause concern among HDFC Bank stakeholders. It hardly befits India’s most valuable bank, which trades at a significant premium valuation to its peers, to have been engaged in such activity; but even more worrying is its lack of transparency once these malpractices came to light.

US Firms’ Class Action Suits: HDFC Bank’s Auto Loan Malpractices Have Hit the Fan

In this insight we bring key thematic/industry insights across the Indian Banks and NBFCs segment, based on management interactions, industry/media sources and earnings update from <a href="https://www.smartkarma.com/entities/jm-financial-ltd" target="_blank" data-smartkarma-citation="entities:7475:1" rel="noopener">Jm Financial (JM IN)</a>, <a href="https://www.smartkarma.com/entities/au-small-finance-bank-limited" target="_blank" data-smartkarma-citation="entities:24196:1" rel="noopener">Au Small Finance Bank (AUBANK IN)</a>, <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> , <a href="https://www.smartkarma.com/entities/rbl-bank-ltd" target="_blank" data-smartkarma-citation="entities:22856:1" rel="noopener">RBL Bank Ltd (RBK IN)</a>, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a>, <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a>, <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank Ltd (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/axis-bank-ltd" target="_blank" data-smartkarma-citation="entities:768:1" rel="noopener">Axis Bank Ltd (AXSB IN)</a>.
Key Discussion Topics
<ul>
<li>Moratorium on Loans</li>
<li>COVID-19 Impact on the Business
<ul>
<li>Provisioning and Potential Impact on Asset Quality </li>
<li>Fixed Costs/Variable Costs Assessment</li>
<li>Customer Engagement</li>
</ul>
</li>
<li>Liquidity and Solvency Conditions</li>
<li>Risk Appetite among Banks</li>
<li>End-User Industry Insights
<ul>
<li>Credit Card Spending and Repayment Behavior</li>
<li>Real Estate Sector
<ul>
<li>On-ground Insights on Construction Activity</li>
</ul>
</li>
<li>MSME Segment</li>
<li>Rural/MFI Segment</li>
<li>Commercial Vehicle (CV) Segment</li>
</ul>
</li>
<li>COVID-19 Led Behavioral Shifts
<ul>
<li>Work from Home Trends</li>
<li>Digitization</li>
<li>Salary Cuts</li>
</ul>
</li>
<li>Policy Suggestion</li>
</ul>
<div class="content-highlight">
Note that this insight is labeled bullish as, while there are near-term challenges for the sector, the under-penetration of financial services in India provide long runway for growth. Also, the presence of high-quality players in the space, suggest that the sector has ample investment opportunities. Apart from our NBFC picks - <a href="https://www.smartkarma.com/entities/bajaj-finance-ltd" target="_blank" data-smartkarma-citation="entities:8950:1" rel="noopener">Bajaj Finance (BAF IN)</a>, <a href="https://www.smartkarma.com/entities/lic-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:15667:1" rel="noopener">LIC Housing Finance (LICHF IN)</a> and <a href="https://www.smartkarma.com/entities/edelweiss-financial-services-ltd" target="_blank" data-smartkarma-citation="entities:15015:1" rel="noopener">Edelweiss Financial Services (EDEL IN)</a>, we have also grown bullish on <a href="https://www.smartkarma.com/entities/hdfc-bank-ltd-4b6b7a92-9087-468d-9dbe-ab169e77f014" target="_blank" data-smartkarma-citation="entities:558:1" rel="noopener">HDFC Bank (HDFCB IN)</a> with valuations becoming more benign.
</div>

In this insight we bring key thematic/industry insights across the Indian Banks and NBFCs segment, based on management interactions, industry/media sources and earnings update from Jm Financial (JM IN), Au Small Finance Bank (AUBANK IN), Yes Bank (YES IN) , RBL Bank Ltd (RBK IN), Indusind Bank (IIB IN), HDFC Bank (HDFCB IN), ICICI Bank Ltd (ICICIBC IN) and Axis Bank Ltd (AXSB IN).
Key Discussion Topics

Moratorium on Loans
COVID-19 Impact on the Business

Provisioning and Potential Impact on Asset Quality 
Fixed Costs/Variable Costs Assessment
Customer Engagement


Liquidity and Solvency Conditions
Risk Appetite among Banks
End-User Industry Insights

Credit Card Spending and Repayment Behavior
Real Estate Sector

On-ground Insights on Construction Activity


MSME Segment
Rural/MFI Segment
Commercial Vehicle (CV) Segment


COVID-19 Led Behavioral Shifts

Work from Home Trends
Digitization
Salary Cuts


Policy Suggestion


Note that this insight is labeled bullish as, while there are near-term challenges for the sector, the under-penetration of financial services in India provide long runway for growth. Also, the presence of high-quality players in the space, suggest that the sector has ample investment opportunities. Apart from our NBFC picks - Bajaj Finance (BAF IN), LIC Housing Finance (LICHF IN) and Edelweiss Financial Services (EDEL IN), we have also grown bullish on HDFC Bank (HDFCB IN) with valuations becoming more benign.


Indian Banks and NBFCs: Noteworthy Trends and Updates

India

RBL Bank Limited operates as a commercial bank. The Company offers banking products and services such as savings accounts, fixed deposits, personal and business loans, debit and credit cards, insurance, investment management, and mobile banking. RBL Bank serves customers throughout India.

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RBL Bank Ltd (RBK IN)

RBI’s 1-Year Extensions to Bank CEOs: Creating Uncertainty and Short-Termism

The favoured treatment RBI has meted to Uday Kotak, and its inability to comprehend the significance of its decision to renew CEO tenures for only ...

Hemindra Hazari

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Recent announcement by Indiabulls HF, a large HFC, to completely reorient its business model towards co-lending suggests that co-lending as a...

Ankit Agrawal, CFA

US Firms’ Class Action Suits: HDFC Bank’s Auto Loan Malpractices Have Hit the Fan

US law firms, Rosen Legal, Pomerantz and Schall have filed class action suits (here, here and here) against HDFC Bank. The grounds are that HDFC...

Hemindra Hazari

Indian Banks and NBFCs: Noteworthy Trends and Updates

In this insight we bring key thematic/industry insights across the Indian Banks and NBFCs segment, based on management interactions, industry/media...

Ankit Agrawal, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

RBI’s 1-Year Extensions to Bank CEOs: Creating Uncertainty and Short-Termism

The favoured treatment RBI has meted to Uday Kotak, and its inability to comprehend the significance of its decision to renew CEO tenures for only ...

Hemindra Hazari

Indian NBFCs: Co-Lending Seems to Be Gaining Traction - Indiabulls/HDFC New Partners in Town

Recent announcement by Indiabulls HF, a large HFC, to completely reorient its business model towards co-lending suggests that co-lending as a...

Ankit Agrawal, CFA

Global Commodity-Related Equity Sectors In Secular Bull

We believe commodities are in the early stages of a new secular bull market. Global Materials & Energy remain our favorite Sector overweights - add...

Vermilion Research

US Firms’ Class Action Suits: HDFC Bank’s Auto Loan Malpractices Have Hit the Fan

US law firms, Rosen Legal, Pomerantz and Schall have filed class action suits (here, here and here) against HDFC Bank. The grounds are that HDFC...

Hemindra Hazari

Indian Banks and NBFCs: Noteworthy Trends and Updates

In this insight we bring key thematic/industry insights across the Indian Banks and NBFCs segment, based on management interactions, industry/media...

Ankit Agrawal, CFA