HDFC Bank has finally found its next chief executive. Anup Bagchi has received Reserve Bank of India’s approval to become MD & CEO for three years. The appointment resolves one problem but raises another: why should the CEO of India's largest private-sector bank have only a three-year horizon when India aspires to build banks capable of competing with the world's largest?

There is an important qualification.

The three-year term was not imposed by RBI on a board seeking a longer tenure. HDFC Bank's board had shortlisted two candidates and applied to RBI for a three-year tenor; the subsequent RBI approval was for three years. The bank's board then appointed Bagchi on the terms approved by RBI, subject to shareholder approval.

Why the board proposed a three-year tenure is not clear. It could have been:

1. the board's independent preference;
2. the board's understanding of the applicable RBI framework;
3. a term proposed in anticipation of what RBI would approve; or
4. some combination of these.

That makes the governance question more interesting.

Regulatory scrutiny of bank CEOs is entirely legitimate. Banks are custodians of public deposits, and their failure can have systemic consequences. But there is a distinction between determining whether someone is fit to run a bank and determining the strategic tenure for which the board wants that person to run it.

HDFC Bank's own history illustrates the point. In 2015, its board recommended five years for Aditya Puri. In 2023, it recommended three years for Sashidhar Jagdishan's reappointment, after RBI approval for three years. The evidence therefore does not support the argument that RBI routinely truncates a longer tenure proposed by the board.

Nor is three years inevitable elsewhere in Indian banking. The government amended the framework for nationalised banks in 2022 to permit an initial term of up to five years, extendable to ten years, subject to the age of 60. The appointments involve the FSIB, RBI consultation and the Appointments Committee of the Cabinet.

International practice is instructive. Singapore requires a bank incorporated there to obtain MAS's prior approval for the appointment of its CEO, but the statutory test expressly centres on whether the candidate is fit and proper.

The US model is less intrusive for many banks.

Depending on the institution, federal rules can require prior notice of the appointment or replacement of a senior executive, with regulators having defined grounds on which to object. The Federal Reserve's process, for example, is built around supervisory factors rather than prescribing a standard CEO tenure.

Britain goes further in spelling out the principle. Under the Senior Managers Regime, the PRA assesses whether the individual is fit and proper and can take action if that ceases to be the case. Importantly, the PRA says a time-limited approval can be imposed by the regulator only where it advances its objectives; it is not the normal basis for setting executive tenure. Firms are also expected to conduct their own due diligence and maintain appropriate succession plans.

The principle is therefore not that regulators should stay out of CEO appointments. It is that the board should choose and hold the CEO accountable, while the regulator establishes the prudential boundary within which that choice is acceptable.

This also raises a question about the board's own responsibility. HDFC Bank has emphasised strengthening its leadership and succession pipeline. But if succession planning is a board responsibility, should the board not also determine what tenure is necessary to execute its strategic mandate?

Three years is not necessarily too short if performance is continuously assessed and renewal is available. But it can create a shorter institutional horizon than the transformation being demanded of the bank.

The hypothetical is revealing. Suppose a Jamie Dimon-type banker wanted to spend a decade transforming an Indian bank into a genuinely global top-ten institution. Would three years be the appropriate initial horizon? The issue is not the individual. It is whether India's governance architecture allows a board to provide the leadership continuity that an ambitious strategy may require.

India wants its banks to become global institutions. Perhaps the question is therefore not whether RBI should approve bank CEOs, but who should determine how long the bank needs its CEO to deliver the strategy approved by its board.

Regulation should police the boundaries of banking. The board should own the strategy and its time horizon; the regulator should intervene only where it advances its objectives. It is not the normal basis for setting executive tenure. Firms are also expected to conduct their own due diligence and maintain appropriate succession plans.