Empowering bankers

Prevention of Corruption Act must be amended fast

Finance Minister Arun Jaitley’s resolve to empower bankers to take tough decisions without fear of reprisal from the government or its enforcement agencies should be welcomed. Public sector bank chairpersons have been caught between rising bad loans – a staggering 8.6 per cent of advances and rising despite many restructuring attempts – and challenging compliance norms under the Basel standards on the one hand and the stifling lack of freedom to take decisions on the other. The arrests of IDBI bank executives by the Central Bureau of Investigation (CBI) over a Rs 900-crore loan default by Kingfisher Airlines is unlikely to have enhanced their confidence to take independent commercial decisions of the type their private sector counterparts make as a matter of course. As a result, while non-performing assets continue to pile up – bad loans of public sector banks (PSBs) rose by about Rs 1 lakh crore during April-December – their resolution has lagged far behind. The key stumbling block in getting rid of bad loans has been the deep-set reluctance of senior bank executives to take a decision about the quantum of haircut. The government has now assured bankers that it is taking steps to remedy this situation.

The key structural change is amending the existing Prevention of Corruption Act, last modified in 1988. Mr Jaitley has said that the government wants the Act to clearly distinguish between an honest mistake and a corrupt decision by a public official, such as a bank executive. Under the current version of the law, as the finance minister admitted, this distinction “is very thin”. That is exactly what the new amendment will aim to restructure. To be sure, the idea behind this amendment is not new. The amendment was first suggested several years ago. The Bill has been through the tortuous process of scrutiny by the Standing Committee on Law and Justice and the Law Commission. Finally, the Bill was circulated in the Rajya Sabha in May 2015, where it lapsed in November 2015. However, an amended Bill has again been brought in Parliament and Mr Jaitley has stated that the latest changes will sufficiently empower bankers to act without the fear of consequences.

Another key step towards resolving non-performing assets (NPAs) is the active role that the Reserve Bank of India (RBI) is expected to play in the near future. The banking regulator has for a while now watched from the sidelines as every effort to force a resolution of NPAs has run aground. But it is now becoming clear that the government is likely to empower the RBI to monitor cases of large wilful defaulters. More specifically, the central bank could be allowed to decide on the losses banks must accept if the Joint Lenders’ Forum (JLF) fails to decide on the haircut. The government is also expected to multiply the RBI’s oversight committee (OC), which ensures that loan restructuring happens in a transparent manner.

Neither of these changes should be delayed any further. While the changes to the Prevention of Corruption Act will allow bankers to act without the fear of being hounded for genuine errors, they will also gain from a more active involvement of the RBI, as it will make the final decision more broad-based and transparent and insulate individual bank executives from accusations of wrongdoing.