The Karnataka Bank Saga...

On February 18, 2025, when Karnataka Bank celebrated its 101st anniversary, Madhusudan Sai, a humanitarian and spiritual teacher, delivered the foundation day address at its headquarters at Pumpwell in Mangaluru, a coastal town in Karnataka. A Carnatic music concert by vocalist Vidwan P Unnikrishnan and flutist Shashank Subramanyam followed.

Present at the event were the bank’s chairman, P Pradeep Kumar, Managing Director and CEO Srikrishnan Hari Hara Sarma, Executive Director (ED) Sekhar Rao, besides some independent directors and the entire management team.

A few months later, on June 29, both Sarma and Rao resigned.

Sarma cited personal reasons for the resignation, including his decision to relocate to Mumbai. Rao cited his inability to relocate to Mangaluru, besides personal reasons.

Sarma’s resignation came into effect on July 15 and Rao’s on July 31.

The bank has formed a search committee to identify suitable candidates for both roles. An external agency has been roped in.

Those who have been following the developments that led to the resignations of the two whole-time directors are of the view that this would have made some of the bank’s board members happy.

Karnataka Bank was founded by a group of agriculturists, lawyers and businessmen, led by BR Vysaray Achar, to promote economic development in the South Canara region. It has no identified promoter.

Its shareholders include domestic financial institutions, foreign portfolio investors, mutual funds and the public.

The bank started operations in May 1924 with the first branch at Dongerkery, Mangaluru. The second branch opened in Madras (now Chennai) in March 1930, and the third in Udupi in January 1934. In the 1960s, the bank acquired Sringeri Sharada Bank, Chitradurga Bank and Bank of Karnataka. Achar was the bank’s first chairman.

Sarma, who had set up Jio Payments Bank Ltd and was involved with the group for about six years, joined Karnataka Bank in June 2023. In the bank’s 99-year history then, he was the first “outsider” to take over the mantle.

The ED joined ahead of him, in February. He, too, was an “outsider”, though he speaks Kannada. He shared a similar background as Sarma’s, having worked in private sector banks and fintech.

Consulting firm Korn Ferry had reached out to Sarma for the assignment after 19 candidates had been interviewed for the post. The board’s search committee, which had seven directors, including chairman Kumar, met Sarma. Incidentally, Kumar, who took charge in 2022, is also the first “outsider” non-executive chairman in the bank’s history. 

The four-hour-long interaction in February 2023 ended with Sarma accepting the assignment. Insiders say he laid down three conditions for his acceptance: the MD and CEO would be based in Bengaluru (not Mangaluru, as had been the tradition); Karnataka Bank would embrace digitisation in a big way; and he would have the freedom to run the bank, while the board would be responsible for policy-making and governance.

By May 2023, the regulator’s approval was through. Sarma joined in June.

Between September 2023 and March 2024, the bank raised Rs 900 crore through preferential allotments from large domestic financial institutions, and Rs 600 crore from qualified institutional investors. It got rid of a big chunk of its high-cost Tier II capital; made hefty investments to build the tech platform; and went for lateral recruitments for many senior positions, including chief product officer, chief information officer, head of HR, heads for corporate and retail banking as well as liabilities and third-party product sales.

The bank’s balance sheet reflects the change. Between 2022-23 (FY23) and FY25, its advances rose 27 per cent, from Rs 61,303 crore to Rs 77,959 crore, and deposits 20 per cent, from Rs 87,368 crore to Rs 104,807 crore. During this time, its gross bad loans dropped from 3.74 per cent to 3.08 per cent, and net, from 1.70 per cent to 1.31 per cent of advances even as the portfolio of restructured assets came down sharply from Rs 2,571 crore to Rs 995 crore.

Investors took note of the progress. The bank’s market cap rose from Rs 4,238 crore to Rs 6,637 crore.

The figures tell a good story. But the honeymoon did not last beyond 18 months. What spoilt the party?

The culture, dear reader. 

It’s not easy for an “outsider”, particularly when the person is not from Karnataka, to navigate the culture of an old private bank rooted in the southern state.

The first flashpoint was the continuation of an independent director as chairman of the board. Incidentally, except for one, the bank’s board has all independent directors. This particular director was about to complete his three-year term. The board’s nomination and remuneration committee recommended another independent director for the position. But it didn’t go through, and the said chairman stayed. Those who opposed the move included the MD and the ED.

Karnataka Bank is an old private sector bank moulded by community ethos, but in many ways it has the character of a public sector bank. The employees are bound by the Indian Banks’ Association-brokered wage pact. A few other banks of its ilk have come out of it, but not Karnataka Bank. The board even discussed whether the Karnataka state service rules could be put in place in the bank!

Incidentally, the language of the board meetings is Kannada. I am told that non-Kannada speaking members had to repeatedly request others to speak in English since they could often not follow the discussion.

Of the bank’s 957 branches, about 600 are in Karnataka, and they account for 70 per cent of the business. The four adjoining states – Tamil Nadu, Andhra Pradesh, Telangana and Maharashtra – have more than 50 branches each. The idea of the new management, led by the MD and the ED, was to reposition the bank – to make it “Bharat ka Karnataka Bank”. But a director commented it should remain Karnataka Bank, the way it had been for 100 years.

That, it appears, was the final straw in the battle between two “outsiders” who wanted to effect a change and the bank that was determined to remain firmly ensconced in its century-old culture.

Call it a clash of egos or cultures, the fact is some of India’s old private banks are a different animal. It’s not easy to ride them. This is not a unique experience. We have seen this with other banks as well.

Ahead of the two top resignations, there were media reports over differences between Sarma, Rao and the bank’s board over some expenditure that had not been cleared by the relevant committee of the board. A statement issued by the bank on June 29 announcing the resignations read: “On the notes to accounts contained in the audited financial statements for FY25 leading to the emphasis of matter in the auditor’s report, the bank states that it has been discussed and amicably resolved.”

The emphasis of matter in an audit report highlights a specific matter already disclosed in the financial statements, which the auditor believes is crucial for the users’ understanding of the financial statements.

Incidentally, a part of Sarma’s variable salary has not been paid yet, though the regulator has cleared it. Apparently, the amount of variable pay committed to him by the bank was not in sync with its existing remuneration policy. It was amended after one year.

The writer, a Consulting Editor of Business Standard, is a Senior Adviser of Jana Small Finance Bank.

Writes Banker's Trust every Monday in Business Standard.

Latest book Roller Coaster: An Affair with Banking

Twitter: TamalBandyo

Website: https://bankerstrust.in