HDFC Bank faces governance test as CEO exit raises questions

Institutions that command exceptional trust must accept exceptional scrutiny. HDFC Bank, long regarded as the gold standard of Indian banking for its professional management, risk discipline and governance standards, carries an even higher burden: having set the benchmark, it must keep raising it. For a bank entrusted with other people's money, even the whiff of misconduct matters.

Questions have been accumulating across different fronts: the earlier GPS-linked auto-loan mis-selling, alleged AT1 bond mis-selling involving its Dubai and Bahrain operations, concerns over legacy asset quality following the HDFC Ltd merger, recent Carlisle fund mis-selling allegations, workplace-culture concerns, the Lilavati Trust controversy, the former chairman's resignation citing values and ethics, and the MSRDC deposit episode. These matters do not carry the same evidentiary status. Some are allegations, some are disputed, and some have been reviewed and closed.

The former chairman's resignation is particularly significant because it came from inside the boardroom. He cited concerns over practices he said were inconsistent with his values and ethics. HDFC Bank's subsequent external legal review found those concerns unsubstantiated. But did the exercise resolve the underlying doubts? It does not appear so. Outside the boardroom and the regulator, the world is little wiser about what was found, what was learnt or what changed. A legal review cannot, by itself, close a governance question.


The MSRDC episode sharpens the concern. The board called it 'business overreach' and imposed ₹1 lakh penalties on three senior executives while finding no mala fide intent or personal enrichment. But if an institutional client was given economics beyond what regulations allowed, did the board know, question or simply look away? If such off-framework payments had become accepted practice, isn't that a governance failure in itself? Even if others did it, was it worthy of HDFC Bank's own governance bar? For a bank of HDFC Bank's stature, a ₹1 lakh penalty risks pushing the matter under the carpet and reducing accountability to theatre.

Poor governance rarely shows itself as misconduct. It can sit in aggressive targets, clever mis-selling, commercial expediency, what never reaches the board, how dissent and whistleblowers are treated, and what senior executives are allowed to get away with. The real danger comes when performance is strong, the CEO is admired and the board stops asking difficult questions.

The harder governance test is confronting a larger-than-life CEO whose stature can make scrutiny look like disloyalty and challenge like disruption. This is often the charge against promoter-led Indian boards, but institutional ownership offers no immunity: a high-performing, high-gravitas CEO can become equally difficult for a board to question.

Perhaps that explains why one hears even sector analysts speak as if nothing can ever go wrong at HDFC Bank. And when uncomfortable questions arise, the response can be: 'what about the other bank?' That is no defence. If HDFC Bank is the benchmark, its conduct must be measured against the standard it claims for itself, not against someone else's failures.

This is where the board earns its keep. Compliance asks whether a rule was broken. Governance asks whether the decision was worthy of the institution. The strongest boards intervene while a problem is still a matter of judgment, before it becomes a matter for a regulator, investigator or court.

More revealing now is HDFC Bank's notification on the CEO exit: 'Despite persuasion, Mr Jagdishan reiterated his decision not to seek reappointment.' Intended as praise, it raises an awkward boardroom question: Why should the public narrative suggest that the board was persuading the CEO to stay, rather than demonstrating that succession was firmly in the board's hands? A board can value and respect its CEO without appearing dependent on him.

The next CEO will inherit a financially powerful institution. But the harder inheritance is whether the governance culture that made HDFC Bank a benchmark still carries the same force. That must show up in tougher challenge, cleaner incentives, credible consequences and a board unafraid to challenge even its most powerful executive.

RBI can regulate capital, liquidity, tenure, disclosures & formal governance structures. It cannot regulate institutional instinct. Most consequential governance failures begin in the space between what the rulebook permits and what a well-governed institution should never consider acceptable. That's where boards matter most.

HDFC Bank built its reputation by being better governed than the regulatory minimum. That was its governance premium. The test is simple: can HDFC Bank become an institution where people do not merely ask whether something is permissible, but whether it is worthy of HDFC Bank? The board and the next CEO must earn that reputation again.