Boardroom Battles Replace Bad Loans as New Fault Line in Indian Banking

A sharp decline in the Nifty Bank index has exposed a shifting landscape of risk in India’s financial sector, where investor anxiety is moving from traditional balance-sheet vulnerabilities to concerns over governance and leadership stability. Over the past three months, the index has fallen nearly 10%, with heavyweight lender HDFC Bank seeing its stock plummet 21%. The market turbulence follows the abrupt resignation of the bank’s Part-time Chairman and Independent Director, Atanu Chakraborty, who cited concerns over internal “happenings and practices” misaligned with his personal values, wiping approximately Rs 87,000 crore from the bank’s valuation.

Background and Context

While the surface-level data suggests resilience, the underlying dynamics point to a crisis of confidence. According to the Reserve Bank of India’s (RBI) Financial Stability Report released in December 2025, the gross non-performing assets (GNPA) ratio for Indian banks improved to 2.1% by the end of September 2025, down from 2.2% in March. Private sector banks reported an even lower ratio of 1.7%. However, analysts at Emkay Global note that this financial stability masks a troubling trend: elevated attrition among Key Managerial Personnel (KMP) driven by management reorientation and, increasingly, governance issues. The focus for investors is shifting from the quality of loans to the quality of leadership.

Key Figures and Entities

The current turmoil centers on HDFC Bank, where exits have accelerated following its merger with HDFC Ltd. In an interview with The Economic Times, MD & CEO Sashidhar Jagdishan described the challenge posed by Chakraborty’s resignation as “like fighting a ghost,” noting that the former director refused to articulate specific concerns despite requests to do so. In the wake of the resignation, the bank terminated Sampath Kumar, its group head of retail branch banking, and two other executives over the alleged mis-selling of Credit Suisse's additional tier-1 (AT-1) bonds.

These events echo the governance failures that preceded the Yes Bank crisis. In 2018, the RBI forced co-founder Rana Kapoor to step down amid governance concerns, and despite subsequent leadership changes, the bank collapsed into a moratorium by March 2020. Similarly, IndusInd Bank faced a leadership shake-up last year after an accounting lapse triggered its largest-ever quarterly loss, leading to the departure of former CEO Sumant Kathpalia and deputy CEO Arun Khurana.

Legal and Financial Mechanisms

The mechanisms of these alleged failures range from opaque boardroom decisions to operational fraud. At HDFC Bank, the board has appointed both domestic and international law firms to review the circumstances of Chakraborty’s resignation and the alleged mis-selling of financial products. Meanwhile, operational risks have materialized at other institutions. The Haryana State Vigilance and Anti-Corruption Bureau has arrested 11 individuals, including six IDFC First Bank employees, in connection with a Rs 590 crore fraud involving government funds. Investigators found that fake firms and forged debit memos were used to divert money from government department accounts. IDFC First Bank has since reimbursed the Haryana government Rs 583 crore in principal and interest.

In a separate case, Kotak Mahindra Bank is reconciling a reported Rs 150 crore gap in deposits belonging to the Municipal Corporation of Panchkula. While the bank asserts that its account opening processes, KYC documentation, and transactions followed due process, it has filed a police complaint and is cooperating with an independent probe to resolve the discrepancy.

International Implications and Policy Response

The series of governance lapses across major private lenders underscores a systemic risk that regulatory reassurances have yet to quell. Although the RBI stated there are “no material concerns on record” regarding HDFC Bank's conduct, the market’s reaction demonstrates that perception can rapidly erode financial stability. The history of the Yes Bank crisis serves as a stark reminder of how boardroom failures can spiral into full-blown economic threats requiring state-backed rescue. For regulators and investors, the implication is clear: the era where asset quality dominated risk assessment is giving way to one where boardroom credibility and operational oversight are the new fault lines of the Indian banking sector.

Sources

This report draws on the Reserve Bank of India’s Financial Stability Report, analysis by Emkay Global, corporate registry data, and reporting by The Economic Times.