Why Axis Bank chief Shikha Sharma tenure was surprisingly cut short

The Reserve Bank of India’s (RBI) questioning on Shikha Sharma’s new term as managing director and CEO of Axis Bank came as a surprise to all, but was led by several developments that annoyed the central bank.

Lack of timely disclosures on bad loans, under-reporting of non-performing assets (NPAs) for two consecutive years and the poorly managed demonetisation programme at the bank prompted RBI to take this unprecedented step of communicating to the bank Board to reconsider Sharma’s fourth term  as managing director and chief executive officer (CEO), insiders told DNA Money.

RBI was in for a surprise when Axis Bank set up a watchlist of Rs 22,628 crore in April 2016 coming immediately after a quarter when the corporate stress was not disclosed. It was not the extent of stress that troubled the regulator, but the lack of transparency in timely disclosure of the actual stress in the corporate loan book of the bank.

“The regulator was upset that the bank came up with such a large watchlist after failing to declare in the preceding quarter. That was the turning point for the regulator. Later, due to pressure from the risk team, the bank was forced to put the list of stressed assets out,” said a source close to the development.

A questionnaire sent to RBI did not elicit any response.

About a week after the RBI asked the Axis Bank Board to reconsider its decision to appoint Sharma for the fourth term, Shikha requested her third term to be extended by seven months to December 2018.

Comparing her planned exit from the bank with that of her predecessor P J Naik, a source said, “Naik did not even come back to his office after the Board refused to extend his tenure. Naik had three months to complete his tenure, but he resigned with immediate effect. But Shikha has sought seven more months into the next tenure in spite of the regulator showing a clear disappointment by asking the board to reconsider a shorter extension.”

From the time Sharma took over in May 2009, bad loans have only been growing. Instead of putting brakes on corporate lending, the bank stepped up lending in 2012 accentuating the problem. 

V Srinivasan, deputy managing director, who came in from J P Morgan in 2009, where he was heading markets, did not go slow on corporate loans. The continuation of an aggressive corporate loan growth strategy was faulty, insiders said, adding that the bank lacked experienced hands at risk management. 

The bank’s gross NPAs were around Rs 25,000 crore at the end December 2017. The year Shikha took over from P J Naik, the NPAs of the bank were a paltry Rs 1,173 crore. Most of the slippages have been from its corporate book. Though the bad loan tide is turning and profits are coming back, the regulator had already made up its mind.

For under-reporting gross NPAs twice in a row, RBI imposed a fine on the bank of Rs 3 crore earlier this year. This was after Axis Bank under-reported NPAs by Rs 9,478 crore for the fiscal 2015- 2016 and under-reporting of Rs 4,867 crore for 2016-17.

Demonetisation was another watershed moment when the regulator was concerned with Axis Bank’s handling of the note ban.

“The top management took it as an opportunity. The branches began to expand business by opening new accounts and the branches got the communication wrong and allowed people to exchange currency higher than the prescribed limits,” said a source.

About 19 officials were suspended and three others were arrested, severely denting the bank’s image.

By Manju AB, DNA Money