Opinion

Bankers unlikely to lose fear of the three Cs

Subir Roy | Updated on January 09, 2020 Published on January 09, 2020

Despite the FM’s assurance to bankers, vigilance officials’ mindset to smell a rat in every loan gone sour isn’t likely to change

Finance Minister Nirmala Sitharaman has taken the unusual step of calling a meeting of senior bank officials at which was present the director of CBI. Her aim was to reassure the bankers that the government was taking steps to address their “fear” of “undue harassment” by the three Cs (Central Bureau of Investigation, Comptroller and Auditor General and the Central Vigilance Commission) on loans gone sour.

This has become necessary as the government is trying to push sanctioning of bank finance without which the economy cannot get out of its present slowdown. Bankers’ apprehensions on this score have been heightened by the inevitable fallout from the huge high profile defaults by absconding borrowers like Vijay Mallya and Nirav Modi. Sitharaman’s action is well-intentioned but former finance minister Arun Jaitley gave a similar reassurance which has obviously not had the desired effect, thus needing a further reassurance. Whenever there is a slowdown there is also an investment strike, so to speak. Investors lose their animal spirits and bankers tighten the purse-strings.

When bank loans turn non-performing, banks’ internal vigilance systems get into their act and come up with procedural lapses. Bankers’ contention is that there will inevitably be a flaw here and there (if you followed every procedure meticulously few loans will get sanctioned). Despite assurances to the contrary, there has not been and is unlikely to be (general feeling among bankers) any effective change in procedure.

Bankers sceptical

Sitharaman has assured that a distinction will be made between genuine commercial failure and culpability. Bankers are sceptical. This is based on the nature of the animal. A vigilance official has the approach and mindset of an investigating policeman whereas what is needed is to recognise a failed business idea for what it is and not smell a rat in every such instance. This is easy to conceive of in the case of a private sector bank but not a government-owned one.

Ideally, vigilance operatives should be guided by the principle of mens rea — whether there was a mental element at play which consciously led to wrongdoing. In reality, the efficiency of a person whose job is to investigate if there was wrongdoing is measured partly by his conviction rate.

High NPAs in public sector banks stem from the reality that in India political parties in power finance their re-election through bank lending. Politically directed lending works something like this. Officials at the dealing level get a signal from above to process and recommend a loan proposal with the right political blessings. The papers go up the system and the loan is eventually sanctioned. Officials who choose not to play ball with this risk a permanent setback to the career.

Has anything changed since the NDA has come to power? The coming into play of the Insolvency and Bankruptcy Code and resolution of stressed assets through the National Company Law Tribunal system has given some momentum to the recovery process for stressed assets. The real danger of even well-connected promoters losing control of assets whose loans turn non-performing has created an incentive for promoters to repay on time. This has eased pressure on bank officials as the investigation process begins when an asset turns non-performing.

Since at the root of it all lies the businessman-politician nexus which leads to unsound loan decisions being taken, the NDA government did make an effort to break this nexus by creating the Banks Board Bureau which was mandated to help select professionally competent people to man the top management of public sector banks and create a system which would improve the governance standards within them.

A good beginning was made by selecting as head of the bureau Vinod Rai, the former CAG who acquired a high profile through critical audit reports on telecom spectrum sale and allocation of coal mines. But the system bit off more than it could chew. Rai’s elaborate suggestions to introduce proper systems were for the most part ignored by the government. Rai left at the end of his term with little to show and the board has since become another faceless entity.

Since the CBI director was present at the meeting in which the finance minister sought to reassure bankers that they need not fear the role of the three Cs, it is worth asking what the perception among bankers is of the most prominent of the three Cs — the CBI. The organisation has in its lifetime been able to bring to book only two real political heavyweights — Lalu Prasad and Bangaru Laxman. But that has been some time ago. Right now, the CBI is seen as a weapon for engaging in political vendetta.

The writer is a senior journalist

Published on January 09, 2020
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