Now you know why the pile of bad loans in India’s state-owned banks has been rising and why both the banking regulator as well as the finance ministry are upset with many bank chiefs.
The official reason behind the growth in bad loans is a faltering economy but everyone knows there is more to it.
Yes, there are bank chiefs who are dishonest. They give loans to those who don’t deserve them and make money cutting such deals. They make money but their banks pay the price. The Reserve Bank of India (RBI) is well aware of this practice. So is the finance ministry. But they don’t openly talk about it as that may shatter public confidence in our banking system, some 70% of which is accounted for by state-owned banks.
On Saturday, the Central Bureau of Investigation (CBI) arrested Sudhir Kumar Jain, chairman and managing director of Syndicate Bank Ltd, for allegedly taking a Rs.50 lakh bribe. His brother-in-laws are allegedly involved in the mechanics of the pay-off.
Jain, who took charge as chief of Syndicate Bank in July 2013, was allegedly offered the bribe for increasing the credit limit of a few companies, throwing banking norms to the wind. A commerce graduate and a chartered accountant, Jain started his banking career in June 1987 in Dena Bank.
There aren’t too many instances of public sector bank CEOs being arrested by CBI, but CEOs stepping down before the end of tenure or being sacked are no novelty. More on them later but let’s first try to understand the modus operandi.
One way of making money is to give loans to a creditor who does not deserve it. The second popular way is giving loans at a price which is lower than what it should have been.
In both cases, the deal maker pockets a certain portion of the load value (could be a few basis points for big ticket loans or even a few percentage points for small loans). The third way of money making is restructuring a weak loan account and giving breathing time to a rogue borrower. I am aware of a former chief of a large public sector bank whose wife used to cut such deals.
In banking lexicon, such deals are called an accommodation, but all such transactions do not necessarily need to involve money. Often a bank chief indulges in such a deal under the influence of politicians in power to ensure a smooth future. And many public sector bankers entertain politicians from their days as general manager, because this helps them climb the greasy pole and become chairman of the bank.
Many appointments of public sector bank chiefs are such quid-pro-quo deals. The favour is returned in the form of loan sanctions and other accommodations.
Last year CBI arrested Shyamal Acharya, a deputy managing director of State Bank of India, the country’s largest lender, for allegedly taking a bribe in kind—an Omega and a Rolex watch worth Rs.7.75 lakh each. Both the watches were seized from Acharya’s cabin by CBI.
Allegedly, Acharya violated norms for a loan approval. The State Bank of India (SBI) instituted a two-member internal panel to look into the allegation but could not find any procedural lapses in a Rs.75-crore loan sanctioned to Delhi-based Worlds Window Group (WWG).
CBI had filed a case against Acharya, K.K. Kumra, who was an adviser at WWG, and Piyoosh Goyal, founder, WWG. Apparently, Goyal had sought a Rs.400 crore loan from the bank and Kumra, a former bank official, in turn got in touch with Acharya, who allegedly influenced his juniors and got Rs.75 crore sanctioned to begin with.
CBI conducted simultaneous raids at various locations including offices and residences of Acharya, Kumra and Goyal and Rs.7 lakh in cash was found in Acharya’s residence. Many bank insiders say Acharya was “framed”.
In 2013, the finance ministry sought an explanation from Corporation Bank chairman and managing director Ramnath Pradeep on charges against him by the Central Vigilance Commission (CVC) over alleged violation of norms. Pradeep faced eight key charges that include sanctioning loans to a few companies in contravention of regulations, extending a big-ticket loan to a tower construction company that had already defaulted on payments to another state-controlled bank, and changing rules in a bid to appoint a consultant at the bank.
I am not aware of the latest development of this case.
CBI in late 2011 had arrested eight senior officials belonging to nationalized banks and financial institutions for allegedly accepting inducements to issue loans to vested parties or leak vital information from their top committees in the so-called loans-to-bribe scam. They were later released on bail.
There have been many instances when a bank chief’s tenure has been cut short by the government for alleged irregularities. For instance, S.C. Basu of Bank of Maharashtra Ltd could not complete his full term in 2006. Ditto N.S. Gujral of Punjab and Sind Bank in Delhi. Chairperson and managing director of United Bank of India Archana Bhargava too has recently settled for a shorter tenure, citing health reasons. Other bankers say there was something more to it behind her exit but nobody has spoken about corruption.
When it comes to being discredited, none can beat the record of former Indian Bank chairman and managing director M. Gopalakrishnan. He was sentenced to one year’s rigorous imprisonment by a CBI court for allegedly causing a loss of Rs.31.75 crore by granting loans without proper security between 1992 and 1996. He was found guilty by the court of conspiracy, criminal breach of trust, misconduct and cheating under various provisions of the Indian Penal Code and Prevention of Corruption Act.
How does one make all bankers, who are custodian of public money, honest and incorruptible? And, how to punish a corrupt one?
One way could be offering them a respectable salary. Currently they earn a pathetic pay packet. Take a look at the chief of State Bank of India who handles a balance sheet of Rs.22 trillion. (I am in no way suggesting that the State Bank chief is corrupt.) And compare it with the chief of any private sector bank who oversees a balance sheet which is one-fifth of the size of State Bank or even smaller. Yes indeed, the State Bank chief lives in a big bunglow in Mumbai’s posh Malabar Hills but that doesn’t add to the salary.
To start with, if the government decides to monetize all benefits that a public sector bank chief earns, their salary will be many times more. Open up the sector; pick up competent people from the market, give the CEOs more money, keep them happy, and put them under 24X7 surveillance. If they are caught taking money, punish them. They are playing with public’s trust, and deserve exemplary punishment.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.