The Central Bureau of Investigation’s (CBI) reported intent to investigate the action of a retired CEO of a Public Sector Bank (PSB) for waiving processing charges of a loan has been rightly objected to by PSBs. The CEO was presumably acting within his discretionary powers. A legitimate business decision involving a modest sum has been called to question by the nation’s premier police authority, which looks into criminal cases.

Concessions in processing fees and/or interest rates on loans are extended either to make the loan proposals acceptable, or when the overall connections of the borrower justify them. Banks do extend extra facilities to a customer who brings them valuable banking business. The concessions might also be warranted to retain an existing connection in the face of stiff competition. Exercise of discretionary powers is not questioned even by the auditors, unless there is clear evidence of malafides.

One might contend that the case in question is only an investigation, which might not result in a criminal case. But the general public, including bank staff, is highly sensitive to any investigation by police authorities. The CBI should generally avoid exercising its powers in cases where business decisions result in losses to a bank. Incurring losses is a part and parcel of any business, or else, no firm would have “Profit & Loss a/c” but instead only a “Profit a/c”.

By making PSBs answerable to CBI even for legitimate actions, the Government is discouraging them from doing what the Finance Minister wants them to do, namely, adhere to the dharma of lending. Further, PSBs came under the ambit of CBI only after nationalisation of banks in 1969, and not when State Bank of India was “nationalised” in 1955. Can it be surmised that as a majority and not sole shareholder, the Government allowed SBI to function on commercial lines, keeping public interest in view?

Now that all PSBs have minority shareholders, the Government should perhaps do a rethink on its role vis-à-vis PSBs. The law allows minority shareholders to prevent a majority shareholder from running a company poorly, as is evidenced by the charge made by Children’s Investment Fund against the Government on the latter’s directive to Coal India, where both are shareholders. How would the Government like it if in the next share offering by a PSB in foreign markets, some intrepid regulator abroad were to insist on putting out the Government’s rules and procedures as one of the risk factors?

Also read: Should CBI investigate actions of public sector banks? - YES

(This article was published on November 16, 2012)
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