The banking business rests on the faith of people. Public sector banks enjoy greater depositors’ trust because of government ownership. There is inevitably an issue of moral hazard, if top functionaries, instead of pursuing corporate goals, work towards personal gain. How does one address this moral hazard?
The ramification of corrupt practices can be very serious. The collusion of banks and financial institutions in three major scams involving the stock market — Unit Trust of India, Harshad Mehta and Ketan Parikh — underscores this aspect. As those scams disclosed, the diversion of funds into shell companies assumed alarming proportions. The UTI chief was booked on criminal charges.
In the Deloitte fraud survey 2012, 73 per cent of the respondents, which included chief risk officers, chief compliance officers, heads of internal audit and senior management personnel in leading banks reported that deviation from existing processes and controls are the cause of fraud in banks.
Hence, discretionary practices do have a role in the banking frauds. Further, 37 per cent of the respondents in the same survey indicated that employees are hand-in-glove with fraudsters. Timely investigation and punishment can act as a good deterrent in such cases.
Or taking a more recent example, the loans extended to Kingfisher Airlines and the Deccan Chronicle group may also be worthy of scrutiny — was there a disregard for due diligence? The mushrooming of emu farms in Tamil Nadu is another case in point.
That said, there is surely room for the exercise of discretion in the conduct of business. The question is when the decisions assume a malafide nature.
It should be remembered that frequent enquiries into normal business decisions can impede the decision-making process.
However, discretion can distort the level-playing field for bank customers and impact the profitability of banks. In the past year, banks have witnessed a sharp rise in NPAs. While the higher NPAs can be attributed to the economic slowdown, we cannot rule out the role of discretionary power.
The issue is whether the discretionary power was exercised to extend or return a favour, or used to further the business interest of the bank.
If there is prima facie evidence of the former, there is nothing wrong in referring the matter to an investigating agency such as CBI. Bankers should pay heed to the adage, ‘Caesar's wife must be above suspicion’.