Private Sector Lenders in India Face Governance Concerns

Key Figures:

• 30%: Reduction in IDFC First Bank's governance score over the last two years
• 17%: Drop in IndusInd Bank's governance score over the same period
• 77: IDFC First Bank's governance score in 2022
• 47.6: IDFC First Bank's governance score in 2026
• 590 crore: Suspected fraud amount disclosed by IDFC First Bank
• 73: RBL Bank's governance score in 2024
• 66: RBL Bank's governance score in 2026
• 74: IndusInd Bank's governance score in 2024
• 61: IndusInd Bank's governance score in 2025

ESG Governance Concerns

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Private sector lenders in India are facing governance concerns from institutional investors, particularly Environmental, Social, and Governance (ESG) funds. The trend is evident in the sharp drop in governance ratings of leading private sector lenders, including IDFC First Bank and IndusInd Bank. Even banks without recent fraud incidents, such as Axis Bank, have seen a reduction in their governance scores.

Why Governance Scores Matter

Governance scores assume significance as they influence investment decisions by ESG funds worldwide. Foreign portfolio investors, such as Norges Bank, assign a significant weightage to governance scores before investing. Domestically, numerous ESG mutual funds floated by asset management companies consider governance scores before investing. A significant drop in governance scores can negatively impact the overall ESG score of a company, affecting current and future potential investors.

ESG Rating Agencies

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ESG Risks Assessment & Insights, a Securities and Exchange Board of India (Sebi)-registered ESG rating firm, compiles governance scores from various key aspects, including board composition and functioning, management track record and control, disclosures, shareholder rights, among others.

Report Card

According to ESG Risks Assessment & Insights data, IDFC First Bank's governance score fell from 77 in 2022 to 47.6 in 2026, following the disclosure of a suspected fraud worth Rs 590 crore. RBL Bank's governance score dropped from 73 in 2024 to 66 in 2026, despite no major fraud incidents. IndusInd Bank's governance score fell from 74 in 2024 to 61 in 2025, following alleged financial irregularities worth Rs 3,000 crore.

Impact on ESG Funds

The drop in governance scores can negatively impact ESG funds, both foreign and domestic, which have a minimum ESG score below which they wouldn't invest. If the ESG score of a company falls significantly, new ESG funds may shy away from investing, and existing stakeholders may look to exit.