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Bank supervision and accountability

Sucheta Dalal

When the then Prime Minister Indira Gandhi nationalised major banks in 1969, her stated objective was to end the cozy little nexus between businessmen and banks controlled by them.

Despite stiff opposition from business houses, she went ahead with the move, riding on tremendous support from the masses that were promised easy access to the banking system.

Mrs Gandhi was hugely successful in her second objective. The bank branch network spread across the country and provided access to innumerable towns and villages of India.

But in the process it also became a terrifically powerful tool of political patronage and control. Banks became the largest and most attractive employers -- so much so that today they are bloated, inefficient and hardly accountable.

Nationalisation itself was a tool to control funding by cutting off or providing access to finance, irrespective of the feasibility of projects.

The government's control over the appointment of bank chairmen and the race for these sought-after postings quickly killed all independent decision-making, paving the way for other evils such as directed and behest lending and loan melas.

Add to this the limited accountability of unionised staff and the recipe for the weakening the system was complete.

When banks were nationalised, all the allegations about various structural weaknesses in the private sector banks were indeed true.

But, as financial experts like A D Shroff had argued, the solution was to strengthen supervision and demand accountability rather than to nationalise banks.

Thirty years on, the banking system has Rs 580 billion of bad loans with bleak chances of recovery. There is little accountability and almost no serious attempt at loan recoveries. Instead of finding long-term solutions, the central government has, over the last few years, pumped in over Rs 150 billion to bail out three chronic loss-makers: Indian Bank, United Commercial Bank, and United Bank of India.

The central government borrows this money at an average rate of 12 per cent and this is over and above the sums spent on re-capitalising banks.

Indiscriminate and behest lending, corruption and the inability by bank managements to force the corporate sector to repay loans have led to the mess.

Less than three years after the bail-out, Finance Minister Yashwant Sinha has announced plans to dole out a fresh Rs 50 billion or so to the same three banks. This is subject to these banks presenting a credible restructuring programme, based on the recommendations of a Working Group on Restructuring Weak Public Sector Banks.

But this is easier said than done. Credible restructuring can only happen if corporate houses are forced to pay back. Though government is attempting to strengthen Debt Recover Tribunals or DRTs, the effectiveness of the freshly empowered DRTs has yet to be tested.

Over the years, corporate houses have grown and industrialists amassed incredible wealth, by simply helping themselves to bank funds.

The provisions of the Banking Secrecy Act ensured that defaulters, including deliberate and habitual defaulters, were never punished and, in fact, allowed to continue borrowing without any prejudicial consequences to their reputation or business.

Curiously, it is bank unions in India, as the stakeholders most likely to be affected by bank closures, which have decided to expose the corporate sector.

The trigger was a recommendation by the Confederation of Indian Industry or CII -- one of India's leading industry associations -- that three big loss-making banks be closed down.

As its first salvo, the powerful All India Bank Employees' Association or AIBEA charged that CII members who had recommended closure of three sick banks were motivated by personal interest of being able to avoid repayments permanently.

They then threw banking secrecy to the wind and named the companies which had defaulted in their obligations to these banks and with which CII committee members were associated.

Tarakeshwar Chakraborti, general secretary of the AIBEA, went on to state that it is the private sector "which is responsible for the current ill-health of banks having borrowed -- peoples' deposit mobilised in the banks and held in trust -- and not repaying the same." This is largely true.

A combination of political patronage and widespread corruption allowed the corporate sector to get away with willful default even as it continued to borrow through other companies. All signs of potential sickness and weak feasibility were simply ignored.

The unions hit pay dirt with their move. When it became clear that bank unions were defying the banking secrecy, the CII, within hours of the submission of their report, simply withdrew the recommendation for closure of sick banks.

Having tasted blood, the unions are going a step ahead. This time they have gone the whole hog and released over 1,000 names of bank loan-defaulters, which have been published as a thick compendium.

The unions took a delegation to the President of India and asked him to intervene in the issue when matters such as bank closure were brought to him for his assent.

By going straight to the President, the bank unions are daring the government to act against them for violating banking secrecy. While the unions are clearly motivated by the need to prevent closure of banks and retrenchment of staff, the release of the defaulters list is bound to turn the heat on government to implement swift and efficient loan-recovery laws.

The unions are not satisfied with DRTs; they want willful default of bank loans to be treated as criminal offence backed by stringent punishment. They have also demanded special courts/legislation for expeditious recovery of 'bad loans'.

Interestingly, unions have also opposed the Asset Reconstruction Companies or ARCs, which will only split banks into bad banks and good banks.

The segregation of bad loans without any fundamental change in policy, without increased autonomy for management accompanied by stricter strict accountability, and without succession planning or elimination of political interference will now work, they say.

As crucial stakeholders who are willing to buck the system, bank unions have the power to be effective. In fact, enlightened trade unions are the only collective force in India, which can break the stranglehold of the neta-babu nexus across all segments of the economy today.

The key is enlightened trade unionism. The bank unions seem on the right course so far. It remains to be seen if they can keep up the pressure and focus on broader national interest.

Sucheta Dalal

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