AU Small Finance Bank assures on governance but investors are not biting yet

On Tuesday, the stock had slumped 13%. The problem was simple but a grave. The small finance bank had failed to make timely disclosure of the fact that its chief risk officer has quit. The concerned officer Alok Gupta had resigned in July but the bank informed the exchanges only on 29 August. Regulatory rules require banks to disclose exits of key personnel in audit and risk roles. Gupta’s exit comes a little too soon for comfort after the resignation of Nitin Gupta, the chief audit officer, in March. Nitin Gupta moved to competitor Equitas Small Finance Bank Ltd. Moreover, it has come to notice that the bank’s internal audit officer too is on his way out.

AU Small Finance Bank released a statement on Tuesday detailing the reasons behind the recent exits. It said personal reasons had motivated Alok Gupta to quit. The resignation of internal audit officer Sudhir Dhir was not disclosed as the bank was taking efforts towards retention. “Announcement based on just his expression (to resign) would be difficult……It is a simple HR issue, not a governance one,” the management said in the investor call today.

That said, the deal breaker in the case of Dhir seems to be the location. The bank is headquartered in Jaipur and requires its audit team members to work out of there. The management said Dhir is keen to relocate to New Delhi due to personal reasons. In an age of digital banking and work-from-home, the location of work being a rigid requirement and a reason for resignation seems superfluous.

Management roles such as risk and audit act as a check for business exuberance, critical in a fiduciary organisation such as a bank. A series of exits from such roles in quick succession is sure to make investors anxious, given the unfavourable optics. Ever since the collapse and the resurrection of Yes Bank Ltd, investors have been antsy on any indication of governance foul play in banks. The covid-19 pandemic has only intensified these concerns.

AU Small Finance Bank’s performance metrics too haven’t been much of a comfort. The lender reported a sharp rise in gross bad loans for the June quarter and an increase in provisions. As such, small finance banks have reported a severe hit from the second wave, reflected in the increase in their stressed loans. The lender has not been an exception to this.