The newest Nobel laureate of Indian origin Mr. Abhijit Banerjee, while speaking to the media at Kolkata recently said that the current crisis in the Indian banking system was frightening and that the public sector banking system in the country was paralysed because of the fear of investigation. He said that this crisis was a matter of deep worry. He pointed out that the very fact that banks appear to be fine and then get into a crisis suddenly indicates that bank balance sheets are not picking up enough information and that banks need to be vigilant. He further said that the government should seriously consider reducing its stake in PSBs so that the CVC does not regulate them. He said that it is the CVC investigation in case of default, which is paralysing bankers. The banking system he said is paralysed by the fear of investigation and that leads to the hiding of faults, which only creates much bigger problems. He thinks that we see a lot of accumulated defaults because of the way banks are regulated and that the CVC is very heavy handed. According to him if there is less government equity in banks and CVC is thus not in picture, then the fear psychosis in the banking sector will be removed.
The crisis in the Indian banking system that Mr. Banerjee refers to is the most obvious and stares in our face. This unresolved crisis is a key factor for the continued economic slowdown that we face. The NPAs in banks continue to mount, more and more banking frauds and wilful defaults are being unearthed, there is no quick resolution of NPA cases under the IBC as was promised, the banks are now hesitant to go to the NCLT and are now back to offering OTS in order to resolve NPAs, government interference in banks which is a prime cause for the blatant NPAs has only increased, with no sign of abating and banks are reluctant lenders today, such that they prefer to park their funds in low income assets with the RBI and into government securities, instead of lending them. The government continues to recapitalise banks, hoping to revive them and to trigger the credit cycle, but has failed to do so.
And the present banking crisis according to us, is not just one of unresolved and mounting NPAs, but also the poor performance and financial position of banks and the significant slowdown in lending by banks. According to us, the following steps need to be taken by the government, to resolve this banking crisis:-
- Stop government interference in banks (loan melas, 59 minutes loans, mergers).
- Strengthen regulation, regulatory supervision.
- Need robust audit and controls.
- Resolve the NPA crisis.
- Banish fear of punishment for bonafide decisions that go wrong.
- Give the freedom to lend, and let it be market driven.
- Technology gets profitability.
- Change the management practices, and bring in accountability.
- Punish all the delinquents; in case of corruption/collusion/negligence.
It is noted that Mr. Banerjee has a major reservation about erring bankers being subjected to CVC investigation, which we think is not correct. Bankers are not the only ones questioned by the CVC, even the senior most bureaucrats too are. The CVC does not interfere in the day to day functioning and operations of bankers. It comes into picture only in those extraordinary circumstances when a loan goes bad, particularly a wilful default and there is suspicion about deliberate negligence, collusion or corruption of bankers therein, which is a serious crime that needs to be investigated. It comes as a disciplinary/punishment procedure as a post mortem for a loan account with suspicion of banker malpractices. Investigation of any misconduct or a crime cannot be a matter of objection by anybody, particularly a Nobel laureate. Every delinquent banker would face investigation and punishment, whether in the public sector or in the private sector, as any other person in such a situation world. An erring banker in the private sector too faces the CBI as we see in the Chanda Kochhar case and there is no reason to spare those in government owned banks.
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