Undoubtedly, fines will be levied and some heads, even senior ones, will roll. But these are punitive measures and there should be no complacency about their effectiveness as deterrents against future violations. The RBI's greatest weakness in this regard is the skill levels of its supervisory staff. The long-standing preference for generalist cadres, which comes with the presumption that anybody can do any job with appropriate training and orientation, must make way for the position that certain functions - such as supervision - require specialised skills developed in the course of acquiring a professional qualification. For supervisors to easily spot violations, they must have skills comparable to the people whom they are supposed to be keeping watch over. Recognition of this lacuna is particularly important at a time when new bank licences are being considered. The new entrants will have to be subject to more intense scrutiny as they put their control systems in place.
The episode reveals a basic imbalance in the performance appraisal framework in the banking sector. Revenue growth and profitability are handsomely rewarded, but where is the built-in offset for regulatory violations? The principle of deferred compensation, which has found some favour in the post-crisis debate on regulatory reform, could also apply here. Managers must be hit where it hurts most - their salaries - if failure to comply is unearthed either by internal or by supervisory inspections. It must be remembered, both by operating banks and those who will come into the business after the new licences have been issued, that the most important resource that banks possess is the trust of the average citizen. Lost trust is hard to regain. Unfortunately, the sting and its aftermath can only serve to reduce public trust in private banks. The changes suggested above are first steps in restoring the trust.