The HDFC Bank episode is a stress test for India’s financial regulators

A bank with nearly 12 crore account holders and assets approaching Rs 40 lakh crore is no ordinary entity. It sits at the centre of India’s financial architecture

By Manoj Arora and Srinath Sridharan

The sudden resignation of Atanu Chakraborty, part-time Chairman and Independent Director of HDFC Bank, triggered considerable speculation across financial and regulatory circles about the reasons behind his departure. When the chairman of India’s second-largest private bank exited, citing concerns over “certain happenings and practices”, the issue extended well beyond one institution or one boardroom disagreement.

A bank with nearly 12 crore account holders and assets approaching Rs 40 lakh crore is no ordinary entity. It sits at the centre of India’s financial architecture, where questions of governance rapidly become questions of systemic confidence.

Two broad concerns have surfaced in recent weeks. The first relates to the alleged mis-selling of Credit Suisse AT-1 bonds to NRI clients through overseas branches. The second concerns allegations regarding extra-out-of-permitted payments routed as marketing or sponsorship expenditure linked to the mobilisation of a large institutional account, as reported by this publication. HDFC Bank has denied wrongdoing and appointed external law firms to examine the issues arising from the chairman’s resignation letter. The Reserve Bank of India also issued a reassurance that, based on its supervisory assessments, it had no material concerns regarding the bank’s governance or conduct.

Yet the episode has triggered a larger, more uncomfortable debate. How does a highly regulated banking system, operating under layers of oversight, still encounter governance controversies of this magnitude? What does this reveal about the challenges of regulating increasingly complex financial conglomerates?

Indian banks are among the most tightly regulated financial institutions globally. The RBI’s prudential standards often exceed international Basel norms in conservatism and supervisory intensity. In the case of listed banks, the governance architecture is even more layered. Such institutions operate simultaneously under the Banking Regulation Act, RBI governance directions, the Companies Act, and SEBI’s disclosure and listing frameworks.

In theory, this creates an unusually dense supervisory structure. The primary constituency from SEBI’s perspective is the shareholders, investors, stock exchanges and securities market while RBI’s framework treats depositors, banking system, financial stability, prudential safety and public confidence as corporate governance concerns besides the stakeholders of SEBI’s framework. SEBI’s framework asks whether a listed entity is behaving fairly towards investors and minority shareholders. The RBI’s framework asks whether the institution is being run safely as a bank entrusted with public deposits and financial stability. One system relies heavily on disclosures and board accountability; the other functions through granular supervisory oversight and continuous regulatory reporting. Between them, serious governance failures should, at least theoretically, become difficult to conceal.

HDFC Bank today is not merely a bank. It sits atop a sprawling financial ecosystem spanning insurance, consumer finance, capital markets, and private equity-linked businesses through multiple subsidiaries and group structures. The reverse merger between HDFC Ltd and HDFC Bank further increased the scale and interconnectedness of the institution. Such financial conglomerates resemble complex ecosystems rather than conventional banks.

This complexity raises difficult regulatory questions. Is India’s current governance architecture equipped to supervise institutions whose activities cut across multiple financial sectors, regulators, subsidiaries, and incentive systems? Does the RBI, despite its formidable institutional capability, possess sufficient supervisory visibility across the wider ecosystem surrounding such conglomerates? Or does regulation remain compartmentalised, with each regulator overseeing only fragments of a much larger risk structure?

The episode also exposes a deeper weakness in modern financial supervision. Investigative journalism appears to have assembled relationship trails, expenditure patterns, and behavioural concerns that had not visibly triggered comparable public supervisory intervention, even though the number of such systemically important conglomerates is very limited.

Equally striking was the absence of visible urgency from market infrastructure institutions like stock exchanges. When serious allegations concerning a publicly listed systemically important bank entered the national public domain, no such institution offered public clarification. In disclosure-driven capital markets, silence raises its own governance questions.

The HDFC episode may or may not ultimately establish wrongdoing. But it has already exposed something more consequential. With the emergence of systemically large financial conglomerates, we need to have an integrated approach where a specialised body ensures governance and regulation based not on the too-big-to-fail but the too-important-even-to-sneeze principle. The extant case should trigger a policy action in this direction.

Arora is a former bureaucrat, and Sridharan is a corporate advisor and author of Family and Dhanda