Yes, it is important for the government to be seen to be responsive to serious fraud at public sector banks, especially in the current, politically sensitive year of a series of state elections that lead up to the general elections next year. But that does not mean issuing directives to banks that are guaranteed to frighten managers into doing next to nothing at a time when the economy is showing some signs of a pick-up in investment.
The directive issued to banks — to, one, examine every non-performing asset larger than Rs 50 crore for possible fraud and refer any scam identified to the CBI and, two, to identify systemic, institutional practices that would prevent fraud, both within 15 days — is designed to stymie banking for the time being rather than to sort things out.
Vigilance officers at banks are supposed to have been at work all the while and would have spotted and reported fraud, if they could spot one. Will a directive from the government give them a special scam-detecting third eye they did not possess earlier? Unlikely.
Will it send panic among staff that had sanctioned loans that have soured, and will they devote all their waking moments to devising retrospective protection for themselves and plotting how to implicate some rival in a possible scam, while doing little actual banking? Very likely.
And, as for creating systemic practices designed to prevent scams, it is always useful for banks to brainstorm on such a subject — but the brainstorming has to begin at the level of the government and the regulator.
Ownership and its exercise at PSBs provide room for non-professional factors to creep into loan sanctioning decisions.
How should ownership/holding structures change?
What role would a bond market play in vetting project viability and relieving bankers of the burden of sanctioning an inflated project loan?
What lacunae prevent such a bond market from functioning? What remuneration structures would provide the right incentives for proper banking? The government and the regulator should lead the debate, not deflect it to the banks.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Do not stymie banks with knee-jerk fiats