By Shivanand Pandit
When the two top bosses of a century-old institution like Karnataka Bank decide to leave within days of each other, both citing “personal reasons,” it is bound to raise eyebrows. On June 29, 2025, the bank disclosed that its Managing Director and CEO, Srikrishnan Hari Hara Sarma, along with Executive Director Sekhar Rao, had tendered their resignations, effective July 15 and July 31, respectively. Sarma attributed his decision to a wish to relocate to Mumbai, while Rao spoke of difficulties in adjusting to Mangaluru, among other personal factors.
At first glance, these explanations seem simple enough — career and life choices. Yet behind the scenes, reports of tensions in the bank’s boardroom suggest there may be deeper reasons. Karnataka Bank, for its part, stated that the board had accepted both resignations and formed a search committee to identify successors. To ensure stability, the bank appointed veteran banker Raghavendra Srinivas Bhat as Chief Operating Officer from July 2 onward. The bank has emphasised that it remains well-capitalised and operationally healthy, insisting its “transformational journey” will continue uninterrupted. However, the timing of these high-profile departures — alongside a recent note from the statutory auditors — hints that other factors may have played a role.
In their FY25 audited statements, statutory auditors Ravi Rajan & Co. LLP and RGN Price & Co. flagged an expenditure of Rs 1.53 crore incurred beyond the authority of the whole-time directors, namely Sarma and Rao. This included Rs 1.16 crore paid to consultants and Rs 0.37 crore in other expenses. Since the bank’s board declined to ratify these outlays, the auditors classified the amount as recoverable from the executives. The note — buried in the Q4 FY25 financials — rattled many stakeholders. Reports indicate that part of the unauthorised spending involved the appointment of a Deputy General Manager for assets and co-lending on January 9, 2025, whose employment was not approved by the board and who resigned barely three months later, on April 8. The same person was then allegedly brought back as an Assistant General Manager, a lower rank not requiring the board’s green light.
This was not an isolated disagreement. There was a prolonged clash of visions: Sarma, who came in from HDFC Bank and Yes Bank as Karnataka Bank’s first external CEO, was keen to accelerate growth after raising Rs 1,500 crore in capital since June 2023. The board, however, maintained a far more cautious stance. Although the bank has stated that the auditors’ concerns have been “amicably resolved,” the friction between Sarma’s reformist ambitions — including a 15.44% growth in retail lending for FY25 — and the board’s traditional outlook appears to have contributed to the churn. Despite a mandate to modernise the 100-year-old lender and strengthen its retail and digital capabilities, the results seem to have fallen short of expectations.
Troubled Past
The current troubles facing Karnataka Bank are rooted in earlier regulatory lapses. In May 2024, the Reserve Bank of India (RBI) imposed a penalty of ₹59.10 lakh on the bank for violating deposit interest rate rules and failing to adhere to prudential norms concerning income recognition, asset classification, and advance provisioning. An RBI supervisory evaluation in 2022 further revealed that Karnataka Bank had opened savings accounts for entities that were not eligible and had failed to review, renew, and classify certain loans as non-performing assets within the prescribed timeframe. Despite the bank’s submissions and appeals, the RBI upheld its decision to levy the penalty, clarifying that the action addressed compliance shortcomings alone and did not affect the validity of customer transactions or agreements while leaving room for further regulatory actions in the future.
Karnataka Bank’s regulatory challenges stretch back even further. In March 2018, the bank reported to the RBI that Gitanjali Gems, linked to controversial businessman Mehul Choksi, had committed a fraud of approximately ₹86.5 crore involving working capital facilities. According to the bank’s stock exchange disclosure, the fraud stemmed from ₹86.47 crore in working capital funding extended to Gitanjali Gems, with losses arising from unrealised export bills and fund diversions. The bank clarified that it did not have any letter of understanding (LoU) exposure to Choksi’s firms and that the working capital finance had been extended through a consortium arrangement, with provisions to be made under RBI guidelines.
This fraud report coincided with the larger scandal surrounding Mehul Choksi and Nirav Modi, who were involved in the ₹13,540 crore Punjab National Bank fraud detected in Mumbai after they fled India in early 2018. While Karnataka Bank was not directly exposed through LoUs, its association with consortium lending to Gitanjali Gems highlighted systemic vulnerabilities in the banking sector’s risk management practices. These incidents, combined with ongoing supervisory concerns, have added to the regulatory pressures now confronting Karnataka Bank.
Disappointing transformational journey
Karnataka Bank’s financial performance for FY25 showed a decline in profitability, with net profit dipping to ₹1,272.37 crore from ₹1,306.28 crore in the previous year. In the fourth quarter alone, profit fell to ₹252.37 crore from ₹274.24 crore year-on-year. While total deposits grew modestly by 6.96% to ₹1,04,807.49 crore, and gross advances rose 6.79% to ₹77,958.72 crore, these growth rates fell short compared to peers in the banking sector. Competitors like the Bank of Maharashtra and the Central Bank of India achieved double-digit credit and deposit growth during the same period, highlighting Karnataka Bank’s relatively muted expansion. For example, the Bank of Maharashtra recorded a 15.7% growth in deposits and 17.4% in credit, whereas the Central Bank of India posted a 7.2% growth in deposits and an impressive 15.2% in credit.
The bank’s efforts to maintain strong capitalisation and improve asset quality have not been enough to offset its modest growth and subdued profitability, especially as sector-wide headwinds persist. Moreover, the anticipated “transformational journey” championed by the outgoing MD & CEO has failed to deliver the robust outcomes that stakeholders expected. Internal tensions became visible when the board refused to ratify some of Sarma’s spending decisions, despite their relatively small size at ₹1.53 crore. Such differences have invited regulatory attention, with auditors’ notes reportedly drawing the eye of the Reserve Bank of India under Governor Sanjay Malhotra, who has been vigilant about governance standards across the banking sector. Against this backdrop, Karnataka Bank’s stock price took a sharp hit, plunging as much as 8% intraday on June 30, 2025, and touching a low of ₹191 on the BSE.
Looking ahead, concerns loom over the future of Karnataka Bank’s digitalisation and realisation push initiated by Sarma, which could face disruption amid leadership changes. According to Emkay Research, the bank may struggle to sustain its transformation agenda unless a capable external MD and CEO is brought in to steer the next phase. The broader banking industry has seen similar leadership shake-ups in regional private sector banks, with varying results: while banks like Federal Bank and Karur Vysya Bank successfully navigated management transitions, others such as DCB Bank and Lakshmi Vilas Bank faltered. Karnataka Bank’s board must now focus on appointing a leader who can revive growth momentum, align with the bank’s long-term vision, and rebuild investor confidence in an increasingly competitive and closely regulated environment.
Takeaways from this episode
In response to recent media reports, Karnataka Bank has clarified in a regulatory filing that the safety and security of its depositors’ funds have always been, and will continue to be, its highest priority. Meanwhile, the All India Bank Employees Association (AIBEA) has also expressed its support for Karnataka Bank, assuring the public that there is no cause for panic and that the Bank remains safe.
However, the recent developments at Karnataka Bank highlight critical lessons in corporate governance and organisational accountability. First and foremost, institutions must establish clear and enforceable limits of authority for all executives and decision-makers. These limits should be embedded in governance frameworks and subject to regular review by the board of directors to ensure that no individual, regardless of rank, can act unilaterally or beyond their scope without appropriate oversight. Failure to implement such controls increases the risk of financial mismanagement or unethical conduct.
Equally important is the role of robust auditing mechanisms. Both internal and external audit functions must be empowered with the autonomy and resources needed to thoroughly assess operations, detect irregularities, and report findings directly to independent board committees. An effective audit process must not merely exist on paper but must have the “real teeth” necessary to enforce compliance, flag breaches of policy, and trigger corrective action without delay.
The Karnataka Bank episode also reinforces the fact that weak corporate governance can quickly erode stakeholder trust, even if a company’s core financial indicators—such as capital adequacy, profitability, or liquidity—remain sound. Investors, regulators, and customers increasingly demand transparency and accountability, and even the perception of governance failure can result in significant reputational and market damage.
In moments of uncertainty or crisis, clear and transparent communication becomes essential. Institutions must proactively engage with their stakeholders, provide timely updates, and back their statements with verifiable data to dispel misinformation and restore confidence. Silence or evasiveness in such situations can exacerbate doubts and fuel speculation.
Finally, the incident serves as a broader wake-up call for all financial institutions. There is a pressing need to strengthen internal governance systems, enhance Know Your Customer (KYC) protocols, and reinforce the internal checks and balances that safeguard institutional integrity. This includes revisiting policies around fund management, delegation of financial powers, and the accountability of senior leadership.
In essence, the Karnataka Bank issue reaffirms a fundamental principle: sustainable success in banking and finance is built on a foundation of sound corporate governance, anchored in rigorous oversight, diligent auditing, transparent operations, and a culture of accountability. These elements are not optional safeguards but essential pillars that protect institutions from internal failures and external shocks alike.
