Bank loans in a time of scams

Bank loans in a time of scams

By now, the finance ministry, the regulators, and almost all investigative agencies are looking into the contours and the magnitude of the loan scam where allegedly a few brokers bribed some executives of banks and housing finance firms to secure money for their clients.

Many believe that it’s a diversionary tactic by the government to shift the spotlight from larger corruption issues at other places that plague India at this point. After all, the Central Bureau of Investigation had started the probe in September 2009 and why did it have to blow the lid off last week? This perception of a deft media management strategy may or may not be true but the fact remains that there is something rotten in certain pockets of the banking system.

Indeed, there is no systemic risk as the loan amount that has been sanctioned through this route is a minuscule percentage of the total assets of the banking system. Also, the quality of such assets is not necessarily suspect because few loan sanctioning officers compromised. There could also be cases where an officer pocketed a bribe even though he did not have any role to play in the sanction of the facility and the concerned firm actually got the loan on the strength of its balance sheet and the viability of the proposal. But it’s time for the banking system to take a close look at the credit processing system.

There are three parts of this system, largely—marketing or sourcing of credit; appraisal of the credit proposals and monitoring the loan accounts. These three functions should be treated as three different divisions and one should be in no position to influence the other’s decision. For instance, the department that sources a prospective loan account under a general manager should not be able to influence the other general manager who appraises the loan proposal. Indeed, some banks do segregate such functions, but the segregation is done at an informal level and there is always scope of one officer influencing the other.

At a parallel level, there needs to be a risk management cell which will look into credit, operational as well as market risk for all assets. Finally, the banking regulator should take a close look at the profile of the independent directors on bank boards. Now, directors represent shareholders as well as different interest group such as small-scale industry, agriculture and so on. The boards need qualified independent directors from diverse fields who can question and challenge the established systems and procedures and they don’t necessarily need to be on the same page on every issue. This is imperative to nip in the bud a larger scam that could be waiting to happen.

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