Updated at 12.55pm on 1 July 2025 to include comment from Karnataka Bank and AIBEA
Karnataka Bank experienced a significant market setback on Monday, 30 June 2025, with its stock price declining by up to 5.75% following the unexpected departure of senior leadership. The market reaction came after Sunday's announcement that chief executive officer and managing director (CEO & MD) Srikrishnan Hari Hara Sarma would be stepping down, attributing his decision to personal circumstances and his intention to return to Mumbai.
Additionally, Sekhar Rao, who held positions as both executive director and board member, submitted his resignation for personal reasons. The departures are scheduled at different times, with Mr Sarma leaving his post on 15 July 2025 and Mr Rao's exit planned for 31 July 2025.
The management has established a search committee to find appropriate successors and emphasised their commitment to maintaining smooth operations during the transition period.
The current executive departures follow a troubled period for Karnataka Bank which has been facing scrutiny over alleged irregularities in the Bank's financial statements. The concerns intensified when the institution experienced a two-week delay in submitting its October 2024 investor presentation, subsequently revealing unauthorised expenditures. These questionable costs were connected to audit services and related activities.
Bank leadership, including chairman Rajkumar, acknowledged that the board had not been informed of these unauthorised expenses beforehand. A dedicated committee was established to find new leadership while, simultaneously, investigating the financial inconsistencies.
The institution currently faces examination by the Securities and Exchange Board of India (SEBI) concerning its financial reporting methods. An independent assessment by auditing firm KG Rao & Co revealed various accounting discrepancies, particularly highlighting expenses that lacked adequate documentation and authorisation.
These developments have created uncertainty among shareholders and other stakeholders regarding the Bank's corporate governance standards and commitment to transparency. The organisation has pledged to address these concerns and achieve complete regulatory compliance.
History of Regulatory Penalties
The Bank's current difficulties build upon previous regulatory violations. In May 2024, the Reserve Bank of India levied a fine of Rs59.10 lakh against Karnataka Bank for breaching deposit interest rate regulations and failing to meet prudential standards for income recognition, asset classification and advance provisioning.
Following a comprehensive supervisory evaluation conducted in 2022, the Reserve Bank of India (RBI) discovered that Karnataka Bank had inappropriately opened savings accounts for entities that didn't meet eligibility criteria. The Bank also failed to properly review and renew specific loan accounts within required timeframes, while neglecting to classify them as non-performing assets.
Despite the Bank's responses and appeals during hearings, RBI maintained its position that the violations warranted financial penalties.
The regulatory authority clarified that its enforcement action focused solely on compliance deficiencies and did not question the legitimacy of customer transactions or agreements. The RBI also noted that this penalty doesn't preclude potential future regulatory actions.
Past Fraud Exposure
Karnataka Bank's regulatory troubles have deeper roots, extending back several years. In March 2018, the institution reported to RBI that Gitanjali Gems, associated with controversial businessman Mehul Choksi, had perpetrated an Rs86.5 crore fraud involving working capital facilities.
According to the Bank's stock exchange filing, the fraud involved Rs86.47 crore in working capital financing provided to Gitanjali Gems, with losses stemming from unrealised export bills and fund misappropriation.
The Bank clarified that it had no letter of understanding (LoU) exposure to Mr Choksi's enterprise and that the working capital arrangements were part of a consortium lending structure, with provisions to be made according to RBI guidelines.
This incident occurred during the broader investigation of Mr Choksi and his associate, Nirav Modi, who were implicated in a massive Rs13,540 crore fraud case involving Punjab National Bank's Mumbai operations which surfaced after their departure from India in early-2018.
UPDATE
Considering the news currently being broadcast by certain media channels, in a regulatory filing, Karnataka Bank says it would like to reassure all its valued customers and stakeholders that the safety and security of depositors' money has always been, and will continue to be, its utmost priority.
"The Bank strongly disapproves and condemns the malicious and baseless rumours recently circulated by a media outlet. These statements are clearly aimed at sensationalising the issue and misleading the public, with motives that appear to be highly questionable. It is important to highlight that Karnataka Bank is well-capitalised, with a capital adequacy ratio (CAR) of over 19.85%, which reflects the soundness of the Bank's financial position and robust risk management practices. The Bank's fundamentals remain strong, and our commitment to transparency, customer service, and ethical governance remains unwavering.
We have initiated appropriate legal proceedings against the media outlet in question for spreading false, misleading, and defamatory content without verifying facts with the Bank.
Despite the seriousness of the claims made, the channel did not reach out to the Bank for clarification, a basic principle of responsible journalism that has been completely disregarded. We urge the public and our customers to rely only on official communications from the Bank and to avoid being misled by rumours intended to cause unnecessary panic."
Meanwhile, All India Bank Employees' Association (AIBEA) also defended Karnataka Bank, saying that there is no need for any panic and the Bank is safe. In a statement, CH Venkatachalam, general secretary of AIBEA, says, "It is true that the managing director and executive director of the Bank have resigned and the same have been accepted by the board. But this has nothing to do with the financial condition of the Bank. The Bank is quite safe and absolutely free from any financial scam affecting the interest of the customers and Depositors."
"In all financial parameters, the Bank has been doing well and there is no reason for any worry or panic about the financial stability of the Bank. The information being spread by a section of the media is malicious," Mr Venkatachalam says.
