Banking, Uncategorized

Bank Lending & Corruption

There was reportedly a recent meeting of public sector bank heads in Delhi with the Finance Minister. The meeting was ostensibly to discuss something related to bad debts, but the emphasis of the discussion, as per press reports, was on the “fear” of bank heads pursuant to the action initiated by CBI against a few officials of one bank. It is extremely surprising that some of the generally well considered, efficient, competent chairpersons of banks were vocal about such irrational fears. It is also interesting that a similar fear was not expressed as vocally when the Chairman of another bank was arrested on corruption charges some months back. There is no evidence to suggest that there is any witch-hunt on against bank boards or officials.

India needs growth and banks play a very vital role in this. Any commercial decision carries with it a reasonable risk of it going wrong. Similarly some decisions might well turn out to be turning points for both the banks and their borrowers. What matters is whether decisions are taken with a clear conscience and with integrity, taking all known risks at that point of time into consideration. The Bank Board Bureau (BBB) under the ex-CAG Mr. Vinod Rai is not there to oversee every bank lending decision and to have bank bosses take a stand that every decision of theirs with respect to lending should be approved, prior to disbursement, by the BBB is nothing short of weird.

There is supposedly a freeze on lending by banks because bank chairpersons and officials are wary of taking decisions. These people have been put in their positions at high salaries to do a job which means they put the funds at their disposal to the best possible use, which includes lending to good borrowers. If they are going to offer lame excuses and avoid their responsibilities, what justification is there for them to occupy those high positions? They would better serve the organisation by quitting and allowing someone else who is willing to do the job they are supp0osed to do to do it.

The hype about increasing bad debts does not help anybody. Certainly there is a problem that needs to be tackled. In this investigative agencies also do have a role. Wrongdoing, if any, whether of corruption or of undue influence, needs to be identified and taken to its logical conclusion, as per the laws in force. This in no way implies, or should be taken to mean, that there will be unreasonable action again bank officials. Only where justified, the agencies and courts will and should do what they are expected to do.

Any Chartered Accountant or Project Consultant worth his or her name can come up with a glossy and attractive project report for almost any project with rosy projections and supposedly attractive returns. It is upto savvy investors and knowledgeable and experienced bankers to separate the wheat from the chaff, and take up the proposals that look good to them. In this there is ofcourse no guarantee that every decision will turn out to be correct, but as long as the bankers can show that they took all reasonable precautions, neither investigative agencies nor courts should commonly find fault.

Bank debts turn bad or doubtful due to various reasons internal or external to the particular enterprise. That there has been political pressure in the past to lend to a particular borrower is hardly a secret particularly given that bank board appointments have largely been influenced by political considerations. Similarly, there has been corruption within the bank too. However, not all decisions have been unduly influenced and many top bank officials have maintained their integrity despite such pressures. This is indeed creditable and needs to be appreciated.

Many infrastructure projects were stalled due to land acquisition and other external issues, and the companies which borrowed for such projects have been unable to repay. The government has made quite a lot of progress in sorting out some of these issues and this process is ongoing. This will in turn start to show up as marked improvements in the bad debts position. However, it is a fairly long process and will take time. Banks will therefore continue to be saddled with such loans remaining doubtful of recovery in the immediate future. This may well constrain those banks from lending too much more. However, to take a stand that banks will not lend till all these issues are sorted out is clearly self-defeating and it is time the government steps in to rectify this position, improve sentiment and ensure that viable projects, which are vital for the country continue to get the funds they need at the right time.

Banking, Uncategorized

Banks and Demonetisation

An unfortunate consequence of this increasingly ugly political slugfest that any “discussion” on demonetisation has become is the dragging of an upright, well-respected RBI Governor into unnecessary controversy. A man too decent to counter all the moronic comments.

There is every indication that all due process was followed before this important decision was announced. The RBI discussed it and made a recommendation. Once the government accepted it, and decided on November 8, 2016 to announce it, approval was taken first from the RBI Central Board and then the Union Cabinet, both of which approved it. The President was also duly informed by the PM before he made his address to the nation.

There would be well be differences on whether the demonetisation was needed, and if there were shortcomings in implementation, however there was no slip-up in procedures. In any case, this issue of constitutional validity of the decision is already being considered by Supreme Court.

To therefore try to use the RBI Governor to score political points is extremely unfortunate. The present Governor, like most of his predecessors, understandably keeps a low profile, speaking when necessary. It is neither necessary, nor in fact advisable, for a Central Bank Governor to fashion himself as a Page 3 celebrity making controversial statements everyday as “evidence” of his independence.

Corruption in the banking sector over the years has been no secret. It is impossible for this sector to remain immune when general values in society were eroding. However, even people like me who have been associated with this sector for years, have I am sure been quite shocked at the extent of rot and greed in banking employees. For sure, the actual number of such black sheep is quite small from all indications, as compared to the total number of employees, and most of the employees have acquitted themselves very well during trying times.

As such feedback of wrongdoing came in, RBI was forced to react and issue some clarifications and make some modification in their notifications. This has understandably led to some confusion in the minds of the public. In hindsight that process could have been handled a lot better but given that an exercise of this size and scale has never been attempted before it was natural that there would be some leaning and correction as they went along.

In the coming days, we might well see many more officials getting caught and the law in that regard will take its course. Enough data and information has been collected by agencies for this to happen. However, it would certainly be prudent to ensure that reputation of banks in general and the RBI is not unduly affected. Banks will remain and will continue to play the role they are expected to in society and in the growth of the economy.