After seeing his campaign against bank defaulters spin out of control, RBI Governor Raghuram Rajan is trying his best to put the genie back in the bottle.
After seeing his campaign against bank defaulters spin out of control, RBI Governor Raghuram Rajan is trying his best to put the genie back in the bottle. Rajan, to be sure, was right in getting banks to speed up the process of recognizing dodgy loans and his initial speeches on wilful defaulters were probably aimed at giving banks courage in going after big defaulters, but with the CBI chief talking of ‘examining all undue accommodation entries’ (in an interview to The Economic Times on the Mallya case), matters are looking quite grave. At the first Ramnath Goenka Lecture organized by the Express Group over the weekend, Rajan suggested a possible way out of the bind we find ourselves in, of bankers turning risk averse and not wanting to lend with even old commercial decisions of theirs now being scrutinized versus catching genuine malfeasance on part of the borrowers or on the part of bankers in lending to some groups. Indeed, it is unfortunate that while government agencies slept over charges of service tax and provident fund dues not being deposited by Kingfisher Airlines, as well as charges of diversion of funds, the blame is now being put on the banks alone – and being in the public sector, most cannot even openly take on their owners. Indeed, it is difficult to see how banks will lend funds to restructured/NPA accounts now – and if they can’t, how are these to be turned around.
Let a group of bankers, Rajan suggested in response to a pointed question, assess whether there was malfeasance in decisions and then look for cash trails before going after anyone. Were bankers to do this, and even construct a time line on the loans given, they would be able to see whether fresh loans were given after Mallya began defaulting and whether these were required or not. Much has been written about banks converting loans to Kingfisher into equity at prices way above the market value – apart from the fact that the pricing was based on the Sebi formula that banks were not in a position to change by themselves, the question is whether there was any other way to revive the loan if Kingfisher was not to get fresh funds? A useful way to do the exercise would be examine other big debt restructuring, including that to state electricity boards or the state-owned Air India, and to see whether Mallya got any more favours from banks in comparison to others. Also, while it is easy to criticize PSU banks for their large NPAs, the group should examine whether these high NPAs are due to the fact that few private banks lent as much to either industry or infrastructure. It is also worth keeping in mind, as SBI chief Arundhati Bhattacharya pointed out in an interview, that things would be very different if the legal process had been more helpful when it came to the banks trying to enforce their rights.
Though the Finance Minister Arun Jaitley has also sought to calm matters by making similar statements to Rajan’s over the weekend, it is clear from the CBI/ED investigation that this is far from happening. The government would do well to tell these agencies to focus on the forensics data and on funds diversion for now, and to leave matters pertaining to banks to a larger group of bankers or other experts. Now that former CAG Vinod Rai has been made the head of the banking board, perhaps this is an exercise he should be tasked with considering his mandate involves ensuring banks maintain absolute probity (that was the thrust of his earlier job) but also have enough independence/ability to function and compete with the private sector that does not have to deal with the CVC/CAG/CBI.