The arrests of several senior public sector bank officials for alleged graft do not appear to reveal any systemic flaws in the way the institutions in question operate. The relevant loans were disbursed by following due procedure and have not turned doubtful. But this itself reveals a deeper systemic flaw. Why do people have to be paid under the counter, if they in fact have been, to do what is right and in the right way? If public money is lost, then that is wrong. But if speed money has to be paid for public machinery to deliver what it is supposed to, then that is extremely disturbing. What is worse is the way the whole matter has been handled. There is a chance that it may end up making decision-makers in public sector financial institutions even more risk averse than they are now, thus creating further disincentives for large-ticket loans to be sanctioned. If excessively large commissions have to be paid by borrowers to loan syndication firms to get quick credit when their business so demands and when such loans are within the institutions’ prudential norms, then there is something wrong with the system. If nothing else, it means that the institutions are losing out on a premium they could have charged for responding to the needs of business with necessary speed.
By all accounts, the level of wrongdoing does not appear to be excessive in relation to the total volume of loans disbursed. Even under the best possible circumstances, there will be a minimum of wrongdoing in administrations run by fallible human beings. The remedy for that exists and is routinely followed. The question is: were the simultaneous arrests and the attendant publicity out of proportion to the alleged level of wrongdoing? This is important at a time when the 2G investigations are on and there is a feeling among a section that attempts are underway to divert public attention from the real thing. This section holds that there appears to be more than one red herring around — be it the selective leaking of the Radia tapes or the bankers’ arrests followed by their quick release on bail. If sanctioning authorities become unduly risk averse, then credit disbursement suffers, with clear negative economic consequences. The existence, and robustness, of loan syndication firms is itself a consequence of the risk-averse approach of officials. They are wary of going out and canvassing for business as they fear the fallout on them if such business comes under a cloud in the future. So firms, which are effectively middlemen or brokers bringing borrowers and lenders together, have a window of opportunity to do good business which also makes the system more efficient. To seek to ban them will be as pointless as the effort to ban middlemen in defence deals after the Bofors episode. There can be a provision to register them to keep dubious or lightweight elements out of the business, but that is unlikely to deliver any significant benefits. The long arm of the law can and should keep a watchful eye on the receipt of illegal gratification, but doubts will be raised when there appears to be considerable zeal in going to town over such action.