Is govt serious about protecting honest bankers?
Lending decisions taken in good faith, say the bankers, are being investigated with the benefit of twenty-twenty hindsight
Earlier this month, Arun Jaitley received much acclaim for defending bankers against what they see is a witch hunt. Lending decisions taken in good faith, say the bankers, are being investigated with the benefit of twenty-twenty hindsight. As a consequence, they say they are scared to lend, with dire consequences for the economy.
But there’s a problem with that narrative: the fear of being caught doesn’t seem to have prevented bankers from lending hand over fist to shady promoters like Nirav Modi, nor did it prevent double-digit credit growth during the boom years. Indeed, if credit growth to businesses has slowed down in recent years, it is in large part due to reckless lending earlier, which has saddled several banks with huge amounts of bad loans and eroded their capital.
On the one hand, it seems logical that bankers will be scared to lend if they see their colleagues are hauled over the coals when loans go bad. Yet, the track record shows this has not inhibited credit growth in the past. Which interpretation is the correct one?
Perhaps they are both right. It is true that bankers are petrified of being hounded for decisions taken years ago and perhaps even after retirement. Once sought-after postings in credit departments are now shunned. But there will always be some reckless ones who are willing to take their chances, simply because the money they can collect through graft is far larger than their salaries. So, the fear of being hauled up inhibits the honest bankers, while it doesn’t seem to deter the corrupt ones. What the draconian Prevention of Corruption Act—dubbed by Jaitley as one of the most badly drafted pieces of legislation—does is inhibits genuine lending, but allows shady advances to go through.
There are other reasons for the contradiction. While no public sector manager will lose his job if he doesn’t meet his targets, he could be denied a promotion or face transfers to unwholesome places. That is one reason why so many don’t rock the boat. After all, witch hunts don’t happen all the time—they happen in fits and starts, after big scandals.
Of course, there are also cases where there is political pressure. And it is only in recent times that the top brass of banks are being targeted, which is why a hue and cry is now being raised. No wonder banks are outsourcing lending to non-banking financial companies (NBFCs), with bank loans to NBFCs growing 30% year-on-year.
Perhaps we expect too much of our bankers, forgetting Keynes’ observation that “A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”
What should be done? This is not the first time that Arun Jaitley has said that the law needs to be changed so that public servants are not harassed for bona fide decisions. In April 2015, he had said the time had come for a law that would distinguish between an erroneous decision and a corrupt one. He said the same thing in 2016 and in 2017 and now earlier this month. Manmohan Singh had said in 2013 that the law was being amended so that no public servant is punished for an act in which ‘mens rea’ or criminal intent is absent. If both the Bharatiya Janata Party and the Congress are agreed on the need to change the law, what is holding them back?
Things may get worse. The Supreme Court ruled in 2016 that officers of private sector banks too are public servants and, therefore, the anti-corruption law applies to them as well. If implemented with the same rigour that is at present reserved for public sector officials, borrowing from banks may soon become much like pulling teeth.
Perhaps the problem is no government wants to show it is soft on corruption, at a time when there have been so many scandals. Throwing a few honest bankers under the bus is an easy way to gain the halo of an anti-graft warrior.
Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at firstname.lastname@example.org
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