Public sector banks have long drawn flak for high non-performing assets and poor standards of governance. Now it seems to be the turn of the “new” private banks, considered the most efficient in the sector, to be the centre of negative attention.

ICICI Bank’s chief executive officer, Chandra Kochhar, is under a cloud for what seems like a sweetheart deal between her husband and Venugopal Dhoot, whose Videocon group is a major client of ICICI Bank and now a key defaulter. Axis Bank CEO Shikha Sharma is facing the indignity of having her continuing leadership questioned by the regulator Reserve Bank of India. In the last few years, Axis Bank’s non-performing assets have risen sharply and it has been hauled up by the RBI for wrongly classifying assets. Both banks have suffered reputational damage and Sharma is leaving by the end of the year.

Several realities emerge from this. One, in an industry beset by poor standards of governance, it is difficult for one segment to remain an island of higher standards and not get contaminated. It now seems governance is poor across India’s banking sector, private and public.

The rise in Axis Bank’s non-performing assets is down to the same malady afflicting public sector banks – large infrastructure projects financed by the bank running into trouble. Such projects are a slippery slope that banks may soon like to avoid. Significantly, the only major private bank untroubled by mounting non-performing assets is HDFC Bank, which has a clear focus on retail customers.

Read this with outgoing Banks Board Bureau chairman Vinod Rai’s observation that public banks are needed for funding infrastructure projects and an uncomfortable question arises: if all banks keep away from such projects how will they be financed? Further, if financing for such projects dries up, won’t the growth prospects of the economy be undermined?

ICICI Bank and Axis Bank are no strangers to working in close proximity to the public sector. ICICI was one of India’s first development financial institutions whose area of focus was large infrastructure projects until it turned into a commercial bank. So, it has all the experience needed to keep its head above water while financing such projects.

Dhoot has pointed out that the State Bank of India is the leader – and ICICI Bank a member – of the consortium that has lent the package to Videocon. So there is nothing specifically questionable about ICICI Bank’s role in this case of lending. It is the private deal between Kochhar’s husband and Videocon which is at issue. Former ICICI Bank chairman N Vaghul has said it is important to distinguish between the bank’s position and Kochhar’s. Maintaining arm’s length relationships is crucial to good governance.

Learning from experience

The origin of Axis Bank, formerly UTI Bank, is even more interesting. It was promoted by a clutch of public financial institutions. Its first leader, Supriya Gupta, came from the State Bank of India and his senior team included many with links to the public sector bank. The bank, in fact, became known for combining the best of public and private sectors – lower staff costs of the former, efficiency of the latter. In the banking sector, UTI Bank represented good value for money. Its most well known head, PJ Nayak, came from the civil service and had a light touch, leaving purely banking matters to bankers. It was only as Axis Bank and particularly under Sharma, who joined from ICICI Bank, that it refashioned itself entirely in the private sector mould.

The point of recalling all this is that neither bank is alien to lending to infrastructure projects or working closely with government entities and that both gave a good account of themselves for quite some time. So, the primary reason for them to fall short in governance goes deeper: there is a governance deficit across the Indian corporate sector. Until the advent of the capital market regulator Securities and Exchange Board of India and the takeover code, leading Indian business houses controlled listed companies with very small holdings and ran them like family businesses. Proximity to or working with the government in itself need not do harm.

One example of a successful mega infrastructure project – initiated by not one but two governments – is the Channel Tunnel, an undersea rail link between France and Britain. Being a unique engineering exercise, it faced several hurdles but overcame them and, according to a historical assessment by the Financial Times, eventually finished a little later than planned and with a huge cost overrun. Although it was approved as a privately-financed and privately-run project, the British government had to come in and guarantee the debt of the private developer, Eurotunnel, when it ran into trouble. A decade after the tunnel became operational, Eurotunnel was forced to restructure and write off five billion euros in debt. Banks had to swap debt for equity and investors complained of loss of equity. It began making a profit only in 2012, in its 18th year.

As the Eurotunnel experience shows, large infrastructure projects cannot succeed without sensible give and take between promoters, government and its many regulators, and major financiers like banks. For this to work, though, the public has to trust the government and the government has to be deserving of their trust. This is illusive in India, where successive governments have been mired in allegations of corruption.

One way that large projects substantially funded by the public and publicly owned via stock market listing can be kept under watch is through shareholder activism, the kind that proxy advisory firms are good at. This will help ensure that the interests of all stakeholders are watched over and any serious deviation from the straight and narrow path of good governance becomes a public issue.

Subir Roy, a senior journalist, is the author of Made in India and the forthcoming Ujjivan: Transforming with Technology.