A course correction after an overreach has come about not just because of the declining share of state-owned banks in total lending over the past several years as reflected in the RBI’s report on trend and progress in banking for 2020-21
Over the last three years, there has been a tacit admission by the government that the sledgehammer approach adopted in early 2018 to address a few bank scams has extracted a huge cost.
A course correction after an overreach has come about not just because of the declining share of state-owned banks in total lending over the past several years as reflected in the RBI’s report on trend and progress in banking for 2020-21. A sulking set of bankers, hurt by the zeal at which central investigative agencies went after them in cases of loans having gone sour can hardly be expected to cheerlead when the economy is on a rebound.
So first there was a vocal show of trust and support for bankers starting from the country’s top leader, and successive finance ministers. Topping that then was an enabling provision in the bill introduced last year to promote a new development finance institution to keep out pesky central probe agencies unless directed by the government. And now comes the tweak in rules by the Central Vigilance Commission or CVC. A media report on Monday said that an expert panel will now vet all cases of suspected loan frauds of ₹3 crore or more to assess whether it should be probed by the Central Bureau of Investigation.
Sorry, but incremental measures aimed at calming bankers alone will not help lead to behavioural change on the part of risk-averse lenders. For that, this or any government will have to have the political risk appetite to keep off from the running of banks with a legislative structure that will ensure professional governance while protecting the majority shareholder’s interest. And as former finance minister, Arun Jaitley once said a certain level of statesmanship or restraint by investigators also. It is that lack of a sense of balance and equanimity which may have prompted bankers now to demand a sunset clause on probes.
Few countries present such a paradox as India. For private banks and non-banking finance companies which are trustees of public funds, there isn’t the shadow of investigative agencies, unlike state-owned banks. It is primarily their board of directors or shareholders who exercise judgement on business calls or cases of malfeasance. There is also the comfort of not having to pursue development mandates and targets like for PSU banks and not having to worry about such costs being underwritten by the government. Coupled with that is an incentive structure skewed in favour of private players with the owner of public banks loath to approve a market-linked reward structure. And the difficulties in enforcing a contract with judicial delays eroding the value of assets.
As long as many of these external constraints remain, lowering of thresholds for judging whether loans approved by banks were malafide or bonafide won’t make any significant impact.
Rather, as an owner -- the government ought to worry about the returns it generates from the banks, optimisation of such returns and utilising that for public policy objectives. But as former RBI Governor Y.V. Reddy once said, the government, the regulator and state-owned banks are like the great Indian Hindu Undivided Family or HUF. There is a political and economic interest in sustaining such a structure.