Don't hound bankers: Defensive lenders are the last thing the economy needs

The arrest of five senior executives of Bank of Maharashtra, including the managing director and his immediate predecessor, has prompted the Indian Banks’ Association (IBA) to condemn the spate of such actions against bankers in the recent past. The latest arrests, made by the economic offences wing of the Pune police, were in connection with sanctioning a loan to real estate developer D S Kulkarni, and the loan had subsequently turned into a non-performing asset. Bank of Maharashtra has said the loan is fully secured and its action of declaring the borrower a wilful defaulter and possession of assets under the Sarfaesi Act show that there was no collusion between the bank management and the company. The IBA held an emergency meeting on Friday and demanded, among other things, the formation of an independent committee that will give clearance for initiating criminal proceedings against senior executives of banks and for directions to prevent recurrences of such incidents.

The anguish of India’s public sector bankers (PSBs) is understandable. As the mountain of NPAs continues to grow — in FY18, gross NPAs increased to Rs 10.3 trillion from Rs 8 trillion a year ago — there has been increasing pressure on the government to show that it is not only resolving the problem but is also cracking down on the perceived nexus between bankers and defaulting company promoters. As a result, several investigative agencies have been accused of being overzealous in their action against bankers who were involved in taking lending decisions. For instance, in January 2017, former IDBI Bank Chairman Yogesh Agarwal and four other executives were arrested in a case linked to the Vijay Mallya loan default. The list of senior bankers facing charges is growly longer by the day, with charge sheets having been filed against at least five former chief executives of public sector banks and scores of other senior officers over the past few months.

It is unexceptionable that action must be taken against bankers who have been complicit in corrupt practices that have led to loans turning bad. It is true that governance standards in some of India’s banks are appalling. For instance, an internal probe at Punjab National Bank showed that as many as 54 employees, at different levels, were responsible for a breakdown in internal filters, which allowed the bank to be defrauded by jeweller Nirav Modi. But it is patently wrong to assume that all bankers are generally corrupt and need to be taught a lesson whenever loans sanctioned by them turn bad. Proper systems must be put in place to ensure that investigations do not degenerate into an ever-expanding witch hunt against bankers. There is also merit in the IBA’s call not to create an atmosphere of fear among bankers because it will end up paralysing banking in the country at a time when credit growth is picking up. While there should be zero tolerance for corruption, bankers cannot be subjected to stop taking decisions because of fear that even genuine mistakes can result in hounding by investigative agencies, sometimes even after their retirement, as is evident in several of the cases. PSBs also need governance reforms — something that has been largely missing so far from the picture even though the P J Nayak committee has given detailed recommendations.