Banking accountability

Robust system is needed for investigation

Bankers are in shock after the arrest of former State Bank of India (SBI) chairman Pratip Chaudhuri by the Jaisalmer Police. Another former SBI chairman Rajnish Kumar called it a “sorry state of affairs” and a former deputy managing director of the state-run bank termed it “absolutely pathetic”. While the merits of the case will be decided in the court, the outrage is completely understandable. The arrest of a former chairman of the largest state-run bank (and also the largest bank) puts everyone in the system at risk and could make the public-sector banking system risk-averse, which would affect the flow of credit in the economy. Incidentally, this happened roughly around the same time the government asked public-sector banks (PSBs) to revise staff accountability policies for loans turning into non-performing assets (NPAs).

Mr Chaudhuri’s arrest is related to a hotel project in Jaisalmer, which SBI financed in 2007. The account was classified by the bank as non-performing in 2010. After the bank failed to recover the funds, the account was given to an asset reconstruction company, Alchemist ARC, in March 2014. Meanwhile, Mr Chaudhuri retired from the bank in 2013 and joined Alchemist ARC. The borrower has contested the resolution process at various levels. Although further investigation will reveal more details, the incident and its potential impact on the banking system raise concerns that must be addressed. Union Finance Minister Nirmala Sitharaman had earlier said the Comptroller and Auditor General of India, Central Bureau of Investigation, and Central Vigilance Commission — the so-called three Cs — would not harass bankers for bona fide business decisions.
 

It is perhaps time to also add state-level law enforcement agencies to the list. It is thus vital to have a proper process in place to address any wrongdoing by bankers and where they can present their position. If bankers are arrested by the state police on the complaint of borrowers or anyone else, they would just stop making decisions. Although the resolution process has improved a great deal with the implementation of the Insolvency and Bankruptcy Code, every account would not be referred to the bankruptcy court, and bankers will need to make decisions in terms of restructuring bad loans and recovery.

Banks also need to strengthen their credit-appraisal systems. PSBs have written off loans worth more than Rs 8 trillion over the past seven years, which is more than twice the capital infused by the government during the same period. This is clearly not a viable way to run banks. PSBs have also witnessed the bulk of the banking fraud over the years. In the given backdrop, questions will often be raised even in the case of genuine business decisions. The public-sector banking system needs wider reforms to address the core issues. The Reserve Bank of India, for instance, should be given the same regulatory powers to regulate PSBs as banks in the private sector. This would help instil discipline among PSBs, and reduce the level of NPAs and frauds. Further, the government should not delay reforms to improve operational efficiency. Some business decisions, to be sure, would still go wrong. The government has done well in this context to focus on accountability issues. It is vital that bankers are given adequate opportunities to defend themselves in case an investigation is necessary.