Boldly but carefully

Important to ensure proportionality in bank fraud probes

There is a new and palpable energy to the authorities’ attempts to run down cases of financial fraud that involve India’s banking sector. This is overdue, as it will help restore confidence in the sinews of Indian capitalism — a confidence that has been left sadly threadbare by events over the past few years. Recently, Minister of State for Finance Shiv Pratap Shukla told the Rajya Sabha that the Central Bureau of Investigation, or CBI, has 292 open investigations related to banking fraud, involving 44 banks.This energy results, no doubt, from the fallout of a Rs 130 billion fraud at Punjab National Bank where some employees were responsible for unauthorised letters of credit to companies related to the jeweller Nirav Modi.  It is thus both politically and economically necessary to act to improve the supervision of banking processes so as to minimise fraud, and to ensure there is accountability for those who have misused processes.

However, it is equally important for all relevant authorities to remember that the banking sector is central to the working of the economy, and confident decision-making in banks is needed for a revival of high growth in India. Bank credit growth is still anaemic. Thus the actions taken by investigators should always be carefully calibrated. Some recent events have led observers to wonder if this principle of proportionality is being considered at all. For example, it has been reported that a lookout circular has been issued for Videocon Group promoter Venugopal Dhoot and Deepak Kochhar, husband of ICICI Bank managing director and chief executive officer Chanda Kochhar, in the case involving improper loans — accusations that are yet to be confirmed. They have only been named in a preliminary enquiry issued by the CBI.

Last week, a former deputy governor of the Reserve Bank of India was questioned about the “20:80” scheme for controlling gold imports that may have led to windfall gains for some jewellers. To most outside observers, even if such gains were made, the rationale for the policy appeared reasonable at a time when the rupee was particularly volatile. Towards the end of the last central government’s tenure, “policy paralysis” descended on India precisely because an anti-corruption atmosphere meant nobody wanted to take decisions. Functionaries being questioned in a criminal investigation for implementing a policy is a dangerous step from the point of view of systemic stability. The executive using investigation of the monetary authority to score political points is not part and parcel of a well-ordered and modern state structure.

It is also worth noting that the CBI has not shown any distinctive skill as an investigative agency in the recent past. Bank fraud is a complex issue; it does not just have multiple ramifications for the economy, but understanding the nature of the crime, or whether one has been committed, is far from straightforward. Officials at the Prime Minister’s Office and the finance ministry who are ultimately responsible for the health of the Indian economy should consider whether the investigative capacity and the incentives for the agency are properly suited for the task at hand.