“I am now a member
of the staff of this bank. Its interests are my interests. Psmith, the
individual, ceases to exist, and there springs into being Psmith, the cog in
the wheel of the New Asiatic Bank; Psmith, the link in the bank’s chain;
Psmith, the Worker. I shall not spare myself."
This is a rather
droll extract from PSmith in the City by P.G. Wodehouse, who gave his readers a
flavour of what banks and bankers are like. The charm has definitely gone and
been replaced with trepidation. Behind the doors of banks, the letters of the
English Alphabet denote different words. While ‘A’ can be assets and ‘B’,
banks, the letter ‘C’ leads to stumbles, as the acronyms of CBI, CIC, CVC and
CID come up. Yes, the new world of banking in India remains humbled and bankers
continue to have a hard time.
The recent case
involving an ex-chairman of a public sector bank (PSB) lays bare the trauma of
being a banker. The bank lends money to a hotel in 2007. The loan turns into a
non-performing asset (NPA) in 2010. In 2013, the bank’s chairman retires in
normal course. In 2014, the NPA is sold to an asset reconstruction company
(ARC). It so happens that after retirement, the chairman becomes a director on
the board of this ARC. And in 2021 there is a non-bailable warrant issued against
the ex-chairman (that is, eight years after he retired), following a case filed
by the defaulter at a local court. The banker is arrested, and granted bail,
but faces the quadruple trauma of losses of reputation, liberty, health and
money, as such cases can go on and on. This is a warning bell for bankers. They
are not safe even after retirement.
This particular
case highlights the risks borne by a banker who is on the lending side or
heading the organization. We have seen several bankers in the dock following
the high-profile default cases of Nirav Modi and Vijay Mallya. Here, the
supposed wrongdoing was in disbursing credit. The focus was more on the bankers
than the defaulters. But no one knows what happened to the bankers who faced a
quadruple trauma. The present case is even more bizarre in this theatre of the
absurd because the defaulter has been heard on a case involving an asset sale
by a bank to another company, but the person singled out is a retired banker
who was not even on the scene when the sale took place.
It has been seen
that defaulters on loans always have their sympathizers; even the Reserve Bank
of India had to withdraw its June 2018 circular which mandated NPAs to be taken
for resolution under the Insolvency and Bankruptcy Code (IBC). Unfortunately,
too many businessmen think they have the right to borrow and not repay as
they’re doing the nation a service. Never mind that when they do well, their
profits go to shareholders and not the government. The typical argument given
is that the economy has done badly and so their business got affected.
It is clear that
such cases will be a reality, going ahead, and there is a need to protect
bankers.
Banks are run on
commercial lines. Today, this is also true of PSBs. The idea of privatization
hinges on these banks turning profitable and thus into good purchases for
prospective buyers. At the same time, PSBs have to carry out various
social-agenda programmes of governments to ensure alignment with larger goals.
They also need to grow their books and make profits. But when the chips are
down and the quality of assets deteriorates, or trouble arises, as in the case
of an NPA sold to an ARC on terms the defaulter found unacceptable, then
bankers are left to fend for themselves.
What is the way
out? The government has a big role to play, with a new ‘bad bank’ being set up
to take on the bad loans of banks. Against the backdrop of the former banker’s
woes, will any bank willingly sell its NPAs if deal values can be disputed in
court and bankers are at personal risk? The government needs to create a new
rule book to incentivize bankers, or else they may find procrastination the
best solution, especially since heads of banks have fixed tenures and would
rather not take decisions that can haunt them years later.
First, just the way
the government runs insurance programmes for health, life and farmers, we need
a new ‘Prime Minister’s Banker Bima’ scheme, under which banks must pay
premiums to insure their personnel against job hazards. The category of
personnel covered could be decided by them. If a case arises, the insurer will
bear the cost.
Second, any case
against a banker should be taken up by a specialized set of lawyers on the
rolls of the Indian Banks’ Association, so that a retired banker faced with
allegations doesn’t have to run around in search of a lawyer. If the person is
in service, the bank would make the legal arrangements, but post-retirement
cases need support too.
Third, all such
cases should be routed through the ministry of finance, where a special
division should be created to ensure order. Presently, the predominant view
held is that a government cannot intervene once a case is sub-judice.
Therefore, there must be a pre-emptive mechanism in place to acquire prior
knowledge of such a problem before it arrives at the doorstep.
A safety net is
required if banking reforms are to succeed. There has been a lot of enthusiasm
in setting up the new bad bank, which may be a non-starter if the present case
is not resolved soon. Also, progress on India’s Insolvency and Bankruptcy Code
could suffer further setbacks if bankers’ fears are not calmed. The current NPA
case emboldens defaulters, and, as aggrieved parties, banks will likely get
more defensive.
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