Bankers in the public sector have been reluctant to take lending decisions due to the fear of investigative agencies in case loans turn non-performing. The government has finally walked the talk on protecting bankers from harassment. This is a welcome move because an atmosphere of fear has affected the flow of credit to the productive sectors of the economy with bankers functioning on the understanding that the best safeguard against investigation is inaction. The government announced this week that the Prevention of Corruption Act had been modified and permission would be required for initiating action against public servants. It has also modified the 2015 framework on large-value frauds. As a result, managing directors and chief executive officers in public sector banks
(PSBs) will not be personally responsible for compliance with different timelines.
The government has empowered the boards of PSBs to put in place a mechanism for compliance with various timelines placed by circulars of the Reserve Bank of India (RBI) and Central Vigilance Commission. Further, an Advisory Board for Banking and Financial Frauds has been set up to examine suspected frauds of more than Rs 50 crore, which involves people of the rank of general manager and above. The board would examine cases before investigation starts. Also, the government has asked banks to set up a committee of senior officials to monitor disciplinary action and internal vigilance cases. Delays in addressing such cases tend to affect the internal environment of banks and result in inefficiency.
These are all steps in the right direction and should help allay fears among public sector bankers. To be sure, it is often not easy to differentiate between lending decisions taken in good faith or with malafide intent. It is possible that lending decisions can go wrong even after following all due processes. Therefore, an initial examination before the investigation is launched should help bankers. However, it is difficult to argue that these steps will be enough. Legal safeguards, in general, do not always prohibit investigating agencies from launching probes, or even making arrests.
Besides, the government should not lose sight of the broader picture. Frauds and non-performing assets (NPAs) in PSBs are not always a result of corruption. As the RBI’s latest Report on Trend and Progress of Banking in India showed, PSBs accounted for over 90 per cent of the amount involved in fraud during 2018-19, “... mainly reflecting the lack of adequate internal processes, people and systems to tackle operational risks”. This clearly indicates that PSBs need wider reforms to build capacity in evaluating risks associated with lending. In the absence of reforms, PSBs will remain vulnerable to frauds and the fear of investigation, despite the safeguards put in place by the government. Since PSBs dominate the banking system, their inability to extend credit directly affects economic activity, although they are losing market share rapidly, both in terms of lending and deposits. There are a number of reasons for the government to implement wider governance reforms in PSBs because — aside from growth concerns — frauds, NPAs, and loss of market share have fiscal implications. The government is not in a position to continuously infuse capital into PSBs.