Vijay Mallya’s failure to pay Kingfisher debt may have created a huge national outrage, but that outrage will be wasted unless we face the issue squarely. Otherwise, there will be a Vijay Mallya every few years.
The latest episodes of bad lending generate a strange sense of deja vu. It also makes us worry. As someone who dealt with hundreds of cases of this kind in the aftermath of the Harshad Mehta and the Indian Bank scams, I sometimes wonder what lessons we have collectively learnt over the years. Then, as now, a shell-shocked nation stood aghast at both the audacity of the main actors and the challenges faced by the system to check them. At that time, I was in the Central Vigilance Commission (CVC), and my colleagues and I advised immediate initiation of disciplinary action in many cases; and quite a few of these ended with imposition of tough punishments. The CVC’s advice was consistent and we always prided ourselves on being fair. Bankers, however, always thought we were harsh, and judged their cases as we would those of civil servants, without understanding the fundamentals of banking.
Some time in 1998, N Vittal, the then CVC, appointed me as head of a drafting committee to write a special chapter on vigilance management in banks. We consulted all the stakeholders—public sector banks (PSBs), the banking division of the ministry of finance, RBI and others—and finished the task within a month. This chapter remains the basic document governing vigilance management in banks till today.
The chapter lays down a modified version of the seven-fold test formulated by the Supreme Court in the KK Dhawan vs Union of India case. Although this case dealt with a civil servant performing quasi-judicial functions, we felt—and the bankers we consulted agreed—that it was broad enough to cover cases of bank managers as well. The test laid down, inter alia, that a vigilance angle in a case would be perceived only if it was characterised by mala fides or if a wrongful loss had been caused to the organisation; or a wrongful gain had resulted to a private party. It could also be perceived if the person concerned had been reckless or grossly negligent in performing her duties; exceeded her powers or jurisdiction; or flagrantly violated systems and procedures. Some amount of protection was provided to bankers by recognising that risk taking formed an integral part of their business. Thus, every loss suffered by a bank need not necessarily become the subject of a vigilance inquiry, unless the decision taken was motivated or reckless.
An investigator had to ask a basic question: Given the circumstances, could an ordinary prudent person have taken the decision in question? Only if the answer was in the negative, would there be a possibility of a vigilance case.
This line of thinking did not satisfy bankers. This test, they said, was too subjective. They also felt the CVC was attaching too much importance to procedural lapses. With the passage of time, in line with the government’s general policy, the role of the CVC was gradually diluted so as to limit its jurisdiction to a few senior managers. Bankers were understandably relieved when this happened because they felt that the CVC was, along with the CAG and CBI, creating a fear psychosis and causing managers to be totally risk-averse. The CVC, on the other hand, always felt that it was only signalling banks to respect prudential banking norms and respect rules.
This conflict has never really been resolved. Banks have always demanded more powers to conduct their own vigilance without the intervention of the CVC or any other third party; but in many cases that has led to cronyism.
The banks’ own relationship with the CVC has been uneasy even in the best of times.
This is the context in which the Vijay Mallya and other NPA cases will come up for decision. The CVC will examine if irregularities have occurred. If they have, it will examine whether there was a vigilance angle; and if there is such an angle, it will insist that accountability be fixed. After the initiation of disciplinary action, it will examine the inquiry reports and recommend punishments in accordance with the nature and gravity of the lapses, the extenuating circumstances, if any, and the past track-record of the officer. If a borrower is guilty of any form of corruption or criminal connivance, the CBI will invoke the Prevention of Corruption Act and initiate appropriate criminal proceedings. These will then undoubtedly drag on for years.
There will be cases where junior officers are made convenient scapegoats simply because they signed on the dotted line, whereas they might only have been following verbal instructions of their seniors. Being off the record, this fact, however, will be difficult to establish in judicial or quasi-judicial forums. Similar is the position of the role of politicians, board members, bureaucrats and others who might have unfairly influenced banks.
In the meantime, after the heat has died, bankers will again cry that they cannot function in this atmosphere of a fear psychosis. Thus, the cycle will play itself out ad nauseam without the managements or the government becoming any the wiser.
The possibility of losses to the tune of lakhs of crores, however, should make the government and indeed all of us think deeply of the nature of the problem. PSBs have had to be repeatedly recapitalised with the help of taxes we all pay. It is not as if the people running them are all incompetent. The incentives they face, however, are perverse. They are sometimes made to feel that they should behave like civil servants; when it comes to meeting targets, however, they are told that they are commercial bankers and should function as such. The two worlds are different, “…and never the twain shall meet.”
Private banks face no such problems. They are guided only by pure commercial considerations, and today their NPAs are much lower than PSBs’ because they cannot be bullied into taking unacceptably high risks.
India is the only democratic country in the world where the state owns commercial banks. Currently, it controls 70% of the banking industry. Shouldn’t a modern state move out of this space and leave the PSBs concerned to swim or sink on their own? Shouldn’t it focus instead on providing an enabling environment where businesses—large and small—can flourish? This role would imply that it should continue to perform its sovereign functions (related to law and order, foreign policy, defence, settlements of disputes, etc), and in addition also take the lead in providing primary education, healthcare and infrastructure to its citizens.
What happens then to the Centre’s efforts at achieving financial inclusion and bringing poor people within the fold of the modern economy? The realisation of these commendable objectives is important. The future of financial inclusion lies in mobile banking. RBI should be liberal in licensing ‘payments banks’. Since PSBs have already opened 20 crore new Jan-Dhan Yojana accounts, the government may, out of practical considerations, continue to use them for this purpose, but compensate them for any losses they incur for performing this function. In fact, this crisis is a good opportunity to carry out fundamental reforms in the banking industry.
The author is former Chief Commissioner of Income-Tax and Ombudsman to the Income-Tax Department, Mumbai