Former RBI Governor Raghuram Rajan’s note submitted to Parliament’s Estimates Committee broadly reflects what is wrong with India’s banking system and why it continues to be hobbled. Rajan has red-flagged many issues ranging from fraud in banks to governance and bad loans. But what should worry many, especially law makers, is the former central bank chief pointing out that India’s banking system has been singularly ineffective in bringing even a single high-profile fraudster to book.
Given the lack of progress on this front, Rajan wants the issue to be addressed urgently, especially since he has submitted a list of high-profile fraud cases to the Prime Minister’s Office urging coordinated action to bring them to book. Unlike the West, India’s track record when it comes to punishing economic offenders — be it those who cheated Indian banks or investors in the capital markets — has been poor. That’s because of pussyfooting by successive governments, investigations that drag on for years and delays in the judicial system.
According to Rajan, rather than holding bankers responsible for specific loans, bank boards and investigative agencies ought to look for a pattern of bad loans that CEOs were responsible for. Indeed, bankers cannot and should not be faulted for loans turning sour as long as their lending decisions are bonafide. But the fact is that if many boards of banks, including some of the top private lenders, had discharged their governance roles, the level of bad loans would have been much lower. Having been slow to recognise the festering issue of bad loans in state-owned banks, the government has not fully addressed the governance deficit in many of these banks.
To its credit, the government and the regulator have attempted to bring about a change in the credit culture with the enactment of the law on insolvency and bankruptcy. But if the government and regulators are to prevent a re-run of another bad loans mess a few years from now, it would be imperative for investigative agencies to bring cases to closure swiftly and more effectively and for greater coordination among bankers, the central bank and the probe agencies well before loans turn bad. It should not be the case again that when growth rebounds, the system is back to another cycle of irrational exuberance. The economic, social and political costs will be high.