All corporate loan defaults not frauds: Vinod Rai

The cacophony of uninformed voices should not impact decision making process of bank executives

Vinod Rai, former comptroller and auditor general and chairman of Banks Board Bureau (BBB), said on Wednesday that all defaults are not wilful and the cacophony of uninformed voices should not impact decision-making of bank executives.

Addressing the 12th convocation of National Institute of Banks Management in Pune, Rai said, “The problems are immense but it is not that we have not faced such problems in the past. In the late nineties, after the Southeast Asian crisis, Indian banks underwent very challenging times, but emerged stronger. Projects do have time and cost over-runs.”

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Rai also touched upon designing compensation packages of bank executives saying BBB is working on those that are comparable to their counterparts in private sector banks. It also proposes to introduce executives with the requisite domain knowledge and experience in handling banking institutions.

He said BBB would look at tools like performance related incentives and employee stock options (ESOPS) to “attract talent into the banking system.”

Rai said an adequate reward structure around ESOPS, performance-linked incentives and other benefits can surely be designed to attract the best talent to the public sector.

The objective of BBB is to guide chief executives and board members in public sector banks with planning and strategy and look into their appointment.

According to Rai, loan defaults occur for a variety of reasons that are beyond the control of the creditor. These defaults merely amount to a breach of contract and, hence, are not necessarily criminal in nature. It would attract criminal prosecution only if fraudulent or dishonest intention is established.

Explaining the role of BBB, Rai said, “The government has taken some resolute steps in the process of reforming the banking sector. Establishing BBB is one such step. The attempt is to provide public sector bank boards a sense of purpose and direction by adequately infusing professionalism and domain experience.”

He added, “We also propose to introduce into the public banking system executives with domain knowledge and requisite experience in handling banking institutions.”