Who would have thought bankers had hazardous jobs?

This is a rather droll extract from PSmith in the City by P.G. Wodehouse, who gave his readers a flavour of what banks and bankers are like. The charm has definitely gone and been replaced with trepidation. Behind the doors of banks, the letters of the English Alphabet denote different words. While ‘A’ can be assets and ‘B’, banks, the letter ‘C’ leads to stumbles, as the acronyms of CBI, CIC, CVC and CID come up. Yes, the new world of banking in India remains humbled and bankers continue to have a hard time.

The recent case involving an ex-chairman of a public sector bank (PSB) lays bare the trauma of being a banker. The bank lends money to a hotel in 2007. The loan turns into a non-performing asset (NPA) in 2010. In 2013, the bank’s chairman retires in normal course. In 2014, the NPA is sold to an asset reconstruction company (ARC). It so happens that after retirement, the chairman becomes a director on the board of this ARC. And in 2021 there is a non-bailable warrant issued against the ex-chairman (that is, eight years after he retired), following a case filed by the defaulter at a local court. The banker is arrested, and granted bail, but faces the quadruple trauma of losses of reputation, liberty, health and money, as such cases can go on and on. This is a warning bell for bankers. They are not safe even after retirement.

This particular case highlights the risks borne by a banker who is on the lending side or heading the organization. We have seen several bankers in the dock following the high-profile default cases of Nirav Modi and Vijay Mallya. Here, the supposed wrongdoing was in disbursing credit. The focus was more on the bankers than the defaulters. But no one knows what happened to the bankers who faced a quadruple trauma. The present case is even more bizarre in this theatre of the absurd because the defaulter has been heard on a case involving an asset sale by a bank to another company, but the person singled out is a retired banker who was not even on the scene when the sale took place.

It has been seen that defaulters on loans always have their sympathizers; even the Reserve Bank of India had to withdraw its June 2018 circular which mandated NPAs to be taken for resolution under the Insolvency and Bankruptcy Code (IBC). Unfortunately, too many businessmen think they have the right to borrow and not repay as they’re doing the nation a service. Never mind that when they do well, their profits go to shareholders and not the government. The typical argument given is that the economy has done badly and so their business got affected.

It is clear that such cases will be a reality, going ahead, and there is a need to protect bankers.

Banks are run on commercial lines. Today, this is also true of PSBs. The idea of privatization hinges on these banks turning profitable and thus into good purchases for prospective buyers. At the same time, PSBs have to carry out various social-agenda programmes of governments to ensure alignment with larger goals. They also need to grow their books and make profits. But when the chips are down and the quality of assets deteriorates, or trouble arises, as in the case of an NPA sold to an ARC on terms the defaulter found unacceptable, then bankers are left to fend for themselves.

What is the way out? The government has a big role to play, with a new ‘bad bank’ being set up to take on the bad loans of banks. Against the backdrop of the former banker’s woes, will any bank willingly sell its NPAs if deal values can be disputed in court and bankers are at personal risk? The government needs to create a new rule book to incentivize bankers, or else they may find procrastination the best solution, especially since heads of banks have fixed tenures and would rather not take decisions that can haunt them years later.

First, just the way the government runs insurance programmes for health, life and farmers, we need a new ‘Prime Minister’s Banker Bima’ scheme, under which banks must pay premiums to insure their personnel against job hazards. The category of personnel covered could be decided by them. If a case arises, the insurer will bear the cost.

Second, any case against a banker should be taken up by a specialized set of lawyers on the rolls of the Indian Banks’ Association, so that a retired banker faced with allegations doesn’t have to run around in search of a lawyer. If the person is in service, the bank would make the legal arrangements, but post-retirement cases need support too.

Third, all such cases should be routed through the ministry of finance, where a special division should be created to ensure order. Presently, the predominant view held is that a government cannot intervene once a case is sub-judice. Therefore, there must be a pre-emptive mechanism in place to acquire prior knowledge of such a problem before it arrives at the doorstep.

A safety net is required if banking reforms are to succeed. There has been a lot of enthusiasm in setting up the new bad bank, which may be a non-starter if the present case is not resolved soon. Also, progress on India’s Insolvency and Bankruptcy Code could suffer further setbacks if bankers’ fears are not calmed. The current NPA case emboldens defaulters, and, as aggrieved parties, banks will likely get more defensive.

Madan Sabnavis is an independent economist and author of ‘Hits & Misses: The Indian Banking Story’