The recent developments at HDFC Bank have revived an old debate in Indian banking: what exactly does independent oversight mean?
As the bank's board reviews concerns reportedly raised by former chairman Atanu Chakraborty before his departure, attention has naturally shifted to the appointment of another former regulator as chairperson. There is nothing unusual or improper about such appointments. Indian banking has long had a tradition of relying on eminent former regulators and senior public officials to occupy leadership roles. HDFC Bank itself has followed this approach for years, while other major private banks have also chosen individuals with regulatory backgrounds.
Yet, the episode raises a broader governance question.
If a chairman leaves after raising concerns about certain practices, what enables a successor to step into the same role with confidence before those concerns are fully debated in the public domain?
The answer may simply be that different individuals assess situations differently. One person's concern may be another person's manageable challenge. That is perfectly possible.
But investors are entitled to ask questions.
As Alexander Pope famously wrote, "Fools rush in where angels fear to tread." The phrase should not be applied literally to accomplished professionals accepting important positions. Yet the underlying question remains valid: what comfort level allows someone to accept a role that another considered difficult enough to relinquish?
The debate also highlights a larger paradox in Indian banking governance.
For years, regulators have emphasised the importance of separating the roles of chairman and chief executive in private-sector banks. The logic is straightforward. The chief executive runs the institution; the chairman oversees management on behalf of shareholders. Separating the roles reduces concentration of power and strengthens checks and balances.
Yet this principle is often discussed without examining the wider banking landscape.
Historically, public sector banks followed the Chairman-cum-Managing Director model, where executive authority and board leadership were combined. However, governance reforms later moved towards separating these roles in public-sector banks as well. The government itself embraced the principle that a non-executive chairman and a Managing Director and Chief Executive Officer could provide better governance.
Yet implementation has been uneven.
This creates an interesting question: if separation of chairman and chief executive is considered such an essential safeguard, should it not be applied with equal consistency across all banks?
The answer is not as simple as saying private banks follow good governance while public-sector banks do not.
Many public-sector banks have moved away from the old Chairman-cum-Managing Director structure. The issue is that the governance architecture of state-owned banks remains fundamentally different because the government continues to be the controlling shareholder and has significant influence over appointments and strategic direction.
Therefore, the governance challenge changes.
In private banks, the concern is often excessive concentration of power in management.
In public-sector banks, the concern is the relationship between ownership, management and the state.
The irony is that Indian banking governance sometimes appears more comfortable questioning private-sector concentration of power than examining the implications of state ownership.
This does not mean government ownership is inherently bad. Public-sector banks have played a crucial role in financial inclusion, credit expansion and economic development. Nor does it mean private ownership automatically guarantees better governance. History has provided enough examples worldwide where private institutions with impressive governance structures failed spectacularly.
Independence Beyond Structure
The global financial crisis demonstrated that independent directors, committees and governance frameworks alone do not prevent failures. Many troubled institutions had all the formal structures of modern governance. What they lacked was genuine challenge and scepticism.
That is the real issue.
Independence is not merely a designation. It is a behaviour.
A chairman is independent not because regulations classify the position as independent, but because the person occupying it is willing to question management, challenge assumptions and take uncomfortable positions when required.
This also explains why banks often prefer former regulators as chairpersons. Such appointments have obvious advantages. Former regulators are seen to understand supervisory expectations, appreciate risk-management concerns and bring credibility with stakeholders. HDFC Bank, in particular, has been following this theme for quite some time, starting with S S Thakur, while the choice of Mr Chakraborty appears to have been a deviation.
There can also be a downside.
Boards may become more focused on regulatory comfort than independent challenge. Governance can become compliance-driven rather than curiosity-driven. The question is not whether former regulators should serve on bank boards; many have contributed immensely. The question is whether their presence strengthens genuine oversight.
More importantly, independence without competence can be equally ineffective.
A board may be fully willing to question management, yet still fail to identify risks if it lacks the technical understanding of banking, markets, technology, risk models and regulatory complexities. The ability to ask the right questions is often as important as the willingness to ask uncomfortable ones.
A truly independent board therefore requires not just individuals who are free from influence, but individuals capable of exercising informed judgement. Otherwise, governance risks becoming a theatre of questions without the ability to evaluate the answers.
The real test of governance is therefore not merely the existence of two chairs instead of one, but whether those occupying them combine independence, competence and the courage to exercise judgement. It is whether someone in the boardroom has the independence to say "no".
That is why the debate around bank chairmanship is bigger than any one institution or individual. Investors do not invest in organisational charts. They invest in trust.
A bank can have separate roles, independent directors and experienced chairpersons, yet still fail if the board does not exercise independent judgement.
Conversely, a governance structure can succeed when people occupying those roles demonstrate courage, transparency and accountability.
The real measure of banking governance is not how many chairs exist in the boardroom, but how independently the people sitting in them actually think.
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