The Rajasthan Police on Sunday arrested former SBI Chairman Pratip Chaudhury in a case of alleged loan fraud involving a private hotel in Jaisalmer. The case relates to properties owned by Godawan Group, which failed to repay the bank Rs 24 crore loan taken for the construction of a hotel in 2008, when Chaudhury was the chairman. The bank had then seized the borrower’s hotels, worth Rs 200 crore, and sold them for Rs 24 crore. The hotels were then sold to Alchemist Asset Reconstruction Company (ARC) for Rs 25 crore in 2016. This was legally challenged by the Godawan Group. Later, after retirement, Choudhury joined Alchemist ARC as a director. While this is a case of alleged fraud, the government has also come up with new guidelines that aim to protect the legitimate commercial decisions of bankers. Public-sector banks have been asked to implement common staff accountability policies for loan accounts of up to Rs 50 crore that turn into non-performing assets (NPAs) from April 1, 2022. These new rules do not apply to fraud accounts. Further, depending on the business size of the banks, threshold limits have been advised for scrutiny of accountability by the Chief Vigilance Officer. At present, different state-run banks follow different procedures for conducting staff accountability exercises. Under the new framework, public-sector banks must complete the staff accountability exercise within six months from the date of classification of an account as bad loan. The past record of the employees will also be considered during the scrutiny. The Indian Banks’ Association (IBA) has welcomed the move, calling it a morale booster for employees. IBA has added that slow credit delivery to industries due to the fear of implication is a cause for concern, at a time when the country is in need of an economic boost. The credit growth of banks in India moderated to 5% in the FY21 from 6.8% in FY20 due to adverse effects of severe economic disruptions caused by the Covid-19 pandemic. While punitive action needed to be taken against the oﬃcers having malaﬁde intent, it was essential to ensure that bonaﬁde mistakes were dealt with compassion, the association said. Two years ago, Finance Minister Nirmala Sitharaman had said that the fear of 3Cs – CBI, CVC and CAG – was affecting the decision-making of banks.
Though all of these may seem well and good, a structural change in regulation is required for better supervision of banks. All commercial banks in India are regulated by the RBI under the Banking Regulation Act of 1949. Additionally, all public sector banks are regulated by the government under various legislation. The RBI’s legal powers to supervise and regulate state-run banks are constrained by Section 51 of the Banking Regulation Act. It cannot remove PSB directors or management, who are appointed by the government, nor can it force a merger or trigger the liquidation of a PSB. It has no powers to either supersede the boards of state-run banks or revoke their banking licence. It has also limited legal authority to hold PSB boards accountable over strategic direction, risk profiles, assessment of management, and compensation. The government should take steps to remove this dual regulation for commercial banks as this problem may lead to banking system frauds. The RBI must be empowered to fully supervise all aspects of public-sector banks, including their corporate governance. For now, let us hope the new rules on staff accountability boost the confidence of bankers.