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Money

Public Sector Banks – Business vs Vigilance

Prof. B.K. Das, Formerly GM, UCO Bank
Oct 2011

Public Sector Banks have been playing a vital role in the economic development of the nation. The flow of credit to agriculture and allied sectors during the 1st two decade of nationalization paved the way for industrial growth because of the robust growth in the rural economy. The contribution of credit to SMEs also heralded entry of Indian economy in the global scene. Never the less the Public Sector Banks have been subjected to continuous criticism by various Govt. agencies and entrepreneurs /borrowers alike in different forum and in different periods. From parliamentary committees to the block level review meetings, the Banks have been facing the flack for the slow and tardy growth of credit and being branded an institution insensitive to the credit needs of the clients. The gap between the expectation and delivery has never been appreciated leaving the Banks to take cover. Banks have been defending themselves quoting the ever-increasing NPA as the prime reason for strictness in credit disposition. This is despite a plethora of laws, like State Public Demand Recovery Act, Agriculture & Misc. Recovery Act, Debt Recovery Tribunal and the SARFESAI Act. These acts cover almost all types of defaulters i.e. from small farmers to top industrial/ business houses. Therefore, it is but natural that eyebrows are raised as to what prevent the Bank officials taking quick, prompt and pro-active decision! Why is that a applicant has to answer a heap of questions and has to run for days and months to get a credit limit sanctioned or even face silent rejection. And why is that Private Sector Banks encash this delay and dillema of the Public Sector counterpart, by delivering a fast decision and thereby increasing their business Is it that Private Sector officials are better qualified and better trained or having better knowledge in comparison to Public Sector Officials.

Fear Psychosis

The reasons are not difficult to find. The officials of Public Sector Banks are constantly under the fear of being prosecuted by the State for any decision going wrong or any credit portfolio turning NPA. The bane of PSBs is that the Govt. imposes too much accountability on the employees. Of course, another view is that the reason for poor performance is the total lack of accountability due to the Govt. policy. Both the views are diametrically opposite, it is strange but true. The truth is that there is harsh accountability if the decision goes wrong and there is no accountability on those who really do not take any decision. There is oppressive level of accountability and punishing the employees for genuine decision taken, which later results in loss and the second is the widely held perception that any PSB official who is totally negative and refuses to take any decisions is never taken to task for his non-performance. Whenever a decision leads to a loss, the concerned official is taken to task, not only by the Bank, but also the agencies of the Govt. like CBI and CVC who step in to examine the decision taken by the officials that too 5 to 7 years back and decide whether he or she should be arrested, or prosecuted. The officials indeed are treated like criminals, till they are acquitted by the courts.

The Govt. should realise that Banking is a commercial transaction and losses are bound to happen even when the decisions are taken by the best of official in the best of circumstance. Every such case, if taken up for investigation, naturally creates fear psychosis among the officials. On the other hand, majority of the officials avoid postings, involving credit decisions, and if at all, they are posted, their attitude is to find out reasons, how to reject the credit proposals. Once a proposal is rejected no other official dares to touch it even if, it warrants a favorable consideration. This fear psychosis exists even though, the commission (CVC) is fully alive to the need for dynamism and bold action on the part of Banks Executives in today's “competitive world” and inspite of CVC instruction to individual banks, such to ensure proper distinction between commercial decisions and mala-fide action. The commission even held meeting of the Chief Executives of Banks with the Director, CBI to clear misunderstanding entertained by Banks concerning the role and attitude of the CBI. They also assure the Chief Executive that it would not hesitate to take lenient view, contrary to the serious view taken by concerned banks.

Oppressive Accountability

Accountability is a must for any organisation especially where money is involved. But the method and process of such mechanism in PSBs is such that it affects the flow of credit to various sectors of the economy and has a negative overall effect. Officials in any in corporate sectors are ultimately accountable to the stake holders through the Board of Directors. Whether a decision is right or wrong, whether it was taken in the interest of the organisation, the right person to judge is the superior authority in the organisation or maximum, the Board of Directors. But in the Public sector Banks, the judges are not senior officials or the Board of Directors of the bank, but outsiders like CBI and CVC. The inspectors of the CBI will examine and decide, whether the decision of the official was right or wrong.

A person who has no knowledge or experience in banking, has to decide whether there was mala-fide in the decision or not. In most of the NPAs, the police officials book the bank officials through the Prevention of Corruption Act and Cr. P.C. They usually build the case by filling case saying that “the Concerned Bank official entered into criminal conspiracy with the borrower to cheat the bank”. A bank officer is very strangely, treated as a public servant to punish him under the P.C. Act but, he does not get protection as Public Servant for discharging his duty under the Cr.P.C., as it is available to other public servants. All these factors build up in the mind of the officials and their decision making process is always guided by these factors. A single case of police case sends a shock-wave among other officers, further strengthening their belief that the best option is to avoid postings, where credit decisions are involved. This amounts to tremendous notional loss to the nation by substantially reducing the credit flow into the economy, thereby affecting the country's economic growth.

There has been constant demand by various segments of the trade bodies including the trade unions to remove the jurisdiction of external agencies over the PSBs. Such agencies can step in only in case of frauds, forgeries and scams of large ramification. Even the F.M. of the country while addressing a conference admitted that the banks are scared of 3Cs i.e. CBI, CVC and CAG and therefore, the flow of credit to various sectors of the economy is inadequate. The officials who are good in taking decisions i.e. capable of expanding business invariably become casualty in vigilance action and the officials inferior to them, at least in their capacity of decision making, rise in their career to occupy top positions ultimately affecting the credit flow. It is like battle casualty /wounded soldiers never become generals and those having cozy posting in peace area get rapid promotion. It is therefore unfair to compare the service quality, timeliness and promptness in dealing with borrowers as prevalent in a private or foreign Bank and a Public Sector Bank. Unless a level-playing field is created, the trade and industry and SMEs will continue to complain against the Banks and the gap between the credit requirement and the supply is bound to remain in the economy.

The Narasimham Committee on financial reform also says “there is indeed no such thing as riskless banking and there would be occasional losses which with benefit of hindsight, might appear to have been avoidable. Provided that the losses are bonafide business losses, they should be accepted as such. Mistakes will be made but an atmosphere of fear of being subjected at some later date, to investigation and unsavory publicity is not conducive to efficient and informed decision making”. The committee also mentions about the promises made by the authorities to the Public Sector Bank officials that mistakes arising out of bonafide decision would not be questioned. Sadly these officials know that these are only mere promises with little, if any, intention of implementing them. Cases are not rare where Central Vigilance Commission insists on issuing a warning to an official before retirement for some minor lapse. And the Bank duly administer the warning on the last day of the officials service asking him to be more careful in the discharge of his duty and it is immaterial that the official had only few hours service left in the Bank. Many Public Sector Banks officials would be able to recall some such instances that had hit their colleagues on the last day in service. Is it then a surprise if Public Sector Bank officials widely perceive the vigilance machinery as a persecuting mechanism from which one has to be lucky to escape?

Learn a Lesson

The whole issue is not whether there should be accountability for losses or not but as to how this would be administered. As the Narsimham Committee put it and which every banker knows, losses are inherent in banking or any business for that matter. Nowhere in the world has a business concern made profit in all its deals as otherwise there is no need to prepare a profit & loss account. Loans in a Bank are business and their decisions can turn bad. In such an eventuality the Bank should learn lesson to avoid similar situation in future .To the best of our knowledge, except Indian Public Sector Bank, nowhere in the world has a policy that every loan loss should be scrutinized with a view to fix accountability on the officials who were associated with the loan.

Interestingly, a study by Department of Economics, Massachusetts Institute of Technology, USA, entitled “Banking Reforms in India” comes out very clearly on the issue. There study has confirmed that Indian Public Sector Banks suffer from “Under Lending” because of the fear psychosis on account of oppressive accountability. To quote “one plausible reason for why this happens is that the loan officers in these banks have no particular incentive to lend. They are government employee in a more or less fixed salary and promotion schedule and the rewards are at best weakly tied to their success in making imaginative lending decisions. On the other hand, failed loans, can lead to investigation by the Central Vigilance Commission, which is the body entrusted to investigative potential cases of fraud in Public Sector. They therefore have a lot to lose and little to gain from being brave in lending.” The same study also says “since Public Sector Banks are owned by the government, employees of the bank are treated by law as public servant and thus subject to government anti-corruption legislation. There is an impression among bankers that it is very easy to be charged with corruption, and the law states that if any government functionary takes a decision which results in direct financial gain to third party, the individual is prima facie guilty of corruption and must from his or her innocence”. The study also says “There appear to be a clear effect of vigilance activity on lending decision. Vigilance activity in a specific bank results in a reduction of credit supplied by all the branches of that Bank by about 3 to 5 percent”.

Shri Das is now Professor in Banking & Financial Services at BIMTECH, Greater Noida

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