Raghuram Rajan wants Public-sector bankers bankers to be saved from Central Vigilance Commission. Much higher in priority is to reduce political pressure on bankers

RBI governor, Dr Raghuram Rajan, has started the new financial year on a very positive note, choosing to bat for bank customers as well as bankers. Although bad loans at public sector banks remain dangerously high, Dr Rajan has decided to tackle the problem of bankers’ reluctance to take bold decisions for ‘fear’ of being skewered by the CVC.

The Economic Times says that the RBI has started a “dialogue with the CVC to define terms like fraud or diversion of funds.” The idea, apparently, is to stop mindless questioning of legitimate banking decisions often based on internal complaints aimed at wrecking careers.

As the governor said recently, “No doubt, mistakes will be made, but if the weight of clean actions builds up, the miasma of suspicion that pervades our society today will ebb. The RBI intends to play its part in making this happen.”

RBI’s lead in pushing for greater clarity about write-offs and lesser harassment is bound to be welcomed by banks. However, this has to be preceded by greater scrutiny of senior management and the board of directors, including the role of government nominees, RBI nominees and public representatives.  

It will be interesting to see how the CVC reacts to this overture, given the recent goings on at United Bank of India (UBI). Its chairman & managing director (CMD), Archana Bhargava, was allowed to leave overnight without any scrutiny of the sharp escalation of bad loans during her short, and controversial, tenure.

Within weeks of her departure, the Bank has announced a major turnaround. Shareholders, who were misled by the Bank’s statements into selling their shares, incurred losses, but RBI and the Securities & Exchange Board of India (SEBI) have been stunningly silent. Similar action by a private company would have led to an inquiry under price manipulation rules.

Also, while bankers hold the CVC responsible for their inaction, why does the same fear not prevent banks from extending large loans, guarantees and extremely favourable corporate debt restructuring (CDR) to politically powerful borrowers? Kingfisher Airlines, the Lanco group and Deccan Chronicle are some recent examples. But the story has been the same for decades. This is because these loans are politically motivated, with the finance ministry providing the cover to CMDs and bank boards for these dubious decisions.

Corporation Bank Officers’ Organisation (CBOO), one of the most vigilant officer groups, in fact, calls for ‘improved governance structures’, in the wake of the UBI episode. Describing the opaqueness of bank board meetings, it says that one-line loan approvals are recorded, while discussion and dissent is not even mentioned in the minutes of the meetings. CBOO believes that CMDs on short tenures inflict greater damage on bank balance sheets because they are not accountable for their actions. RBI and the finance ministry need to introduce ‘minimum disciplinary and accountability standards’ for CMDs and CEO.

Since top appointments at banks, including those of their directors, are political decisions, the CMDs, who reciprocate with extending bad loans, guarantees or restructure existing loans, are protected. In the past decade, legitimate internal complaints (from unions and even directors) in Corporation Bank, Bank of Maharashtra, Central Bank of India, UBI and Canara Bank have tried to prevent the CMDs from going on a value-destruction spree. While RBI went through the motions of investigation, no meaningful action was initiated or ordered.

It will be nice to see if Dr Rajan works on this issue as well. Otherwise, his intervention with the CVC will only offer more protection to those who are clever enough to put a smart spin on deliberate bad decisions. With Rs4 trillion of bank loans in the process of being restructured, the time for a clean-up from the top is now.