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Recently, Ritabrata Banerjee, an independent MP of Rajya Sabha from West Bengal in an unstarred question (Question No. 4062) asked in the Rajya Sabha session, whether loans amounting to `2.4 lakh crore of Public Sector Banks (PSBs) related to influential corporates have been written off by the present central government. In its response, the government admitted, “As per the data of Reserve Bank of India (RBI) on global operations, PSBs have written-off (including compromise) an amount of `2,41,911 crore from financial year 2014-15 till September 2017.” But the question is - whose money is the government writing off? According to many political sources, it is actually the taxpayer’s money that is being written off by the government as corporate loan waivers.

According to a tweet by the Indian National Congress (West Bengal) on April 3, 2018, “Piyush Goyal was an Ex-Director of Shirdi Industries which raised large amounts of loans & delayed payments. Shirdi’s promoters continually extended unsecured loans through another entity Intercon Advisers, run by Goyal’s wife, despite owing money to PSU banks.”

Business Economics spoke to Samir Ghosh, veteran banker and the present General Secretary of All India Reserve Bank Employees Association (AIRBEA). He informed, “There are some important factors that can attribute to the NPA crisis and point out to the ‘performance-accountability’ quotient of the banking sector. Firstly, undesirable political or hierarchical, quaestuary pressurisation to grant loan; secondly, improper assessment of the projects; thirdly, inefficient monitoring of the loan accounts; and fourthly, global economic downturn.” 

He further elaborated, “Unwelcome pressurisation from various sources to grant undeserving loans in our country cannot be denied. Incorrect assessment of the loan related projects and inefficient monitoring on the part of the banks and financial authorities add to the liability of the banks and the financial sector in light of the lack of performance accountability quotient. The great economic recession happened worldwide from 2007 to 2012 and impacted the global economy. This economic downturn is a major factor for the increasing NPA of the Indian economy. Prospective projects might turn to loss yielding ones due to global economic downturn. Presently, the Reserve Bank of India (RBI) does not hold any direct audit over the banks. It is totally dependent on the bank officers’ reports on the performance of the banks, which can be easily forged or manipulated. This factor has to be reviewed and corrected if we need to have clarity in the entire banking system.” According to Ghosh, the RBI needs to increase its penetration in several regulatory bodies. As per the AIRBEA’s proposal, if necessary, the RBI has to enter into micro management of the regulatory bodies to arrest corruption. 

He emphasised, “We have enough manpower to be engaged in the micro management of the RBI in its representation in the important regulatory bodies of our economy.” He also stated, “Corrective measures in all the above discussed points jointly can halt the downfall of the economy and arrest the economic crisis.”

According to the RBI’s Financial Stability Report published in June, 2017, the risks to the banking industry’s stability have worsened. It warns that the banking system’s gross bad loan ratio will rise to 10.2% of the total loan book in March 2018 from 9.6% in March 2017. The ratio may even jump to 11.2%. For public sector banks, the gross NPA could be as much as 14.2% by March 2018, rising from 11.4%.

An officer of a private bank who refused to be named told BE, “In light of the current NPA problem and high profile frauds plaguing the Indian banking system, the first thought that comes to a layman’s mind is to fix accountability at all levels of the banking system. But the problem is far more deep-rooted and goes back to several years. Hence one has to approach and find solutions rather than take knee jerk reactions. Clearly, banks need to have better risk management to be set in place and ensure greater accountability for better controls. The bank board, regulators and the government cannot be absolved.”

Ambar Nath Ghosh, Professor of Economics in Jadavpur University, spoke to BE regarding performance accountability in financial sector. He said, “If we study the behaviour of non-performing assets in India’s banking system, we find that the proportion of non-performing assets in total bank advances started rising since the onset of recession in 2011-12. The recession is continuing since then. During 2003-04 to 2010-11, the average growth rate of real GDP was 8.5%, which dropped substantially during 2011-12 to 2015-16. Even going by the new data derived using new methodology and a new base year 2011-12, which has substantially raised the growth rates of 2012-13 and 2013-14, the average annual growth rate during 2012-13 to 2015-16 is around 6.5%. If we had applied the same methodology and the base year to estimate the growth rates of the boom period (2003-04 to 2010-11), the average annual growth rate of the boom period would have been much higher than 8.5%. Thus, recession is at the root of the problem of non-performing assets of the banks. Demonetisation by contributing to recession has aggravated the problem of non-performing assets. The best way of tackling the problem of non-performing assets is through the adoption of counter recessionary measures. Since the problem is due to recession, which is completely beyond the control of banks, bailing out the banks by buying up their non-performing assets should have been a part of this counter-recessionary strategy, which the US and European governments did following the recent financial meltdown in their countries.

Discussing on the government’s role, Ghosh commented, “The Government of India is taking the banks to task. To avoid bailing out the banks using budgetary resources, it has proposed to use deposits of depositors for this purpose in its FRDI bill. This bill has scared away savers from banks and can seriously undermine their lending capacity, business and profit. The government, through its different regulatory measures, has forced banks to tighten their credit standards. This has led to shrinkage of supply of bank loans to small and medium producers aggravating recession and inequality. Thus, all the measures adopted by the government are recessionary and highly inimical to the banks and to society at large. The recent spate of large bank frauds has added to the woes of the banks and has made people lose their faith in banks. That has undermined the economy’s health. More than 80% of the loans of the banks are with the giant capitalists, some of whom are also responsible for all the recent large bank frauds. The source of corruption in India and also in other capitalist countries is the system of private funding of political parties. India is a highly unequal country. According to a recent India Inequality Report (2018) published by Oxfam India, 73% of India’s wealth is owned by one percent of Indians. This estimate has been made on the basis of declared assets. If undeclared assets were taken into account, the inequality would have been much greater. This inequality in the distribution of wealth also reflects the inequality in the distribution of income. Thus, most of India’s GDP accrues to just a handful of capitalists. In a democracy, political parties need enormous amounts of funds to sustain themselves and to compete with one another. Obviously, they get these funds from the rich. Hence, they have to work for the rich. The rich fund the political parties to protect their vast wealth from the masses and to increase their command over GDP without any hindrance. This is at the root of the large frauds and scams. For democracy to be a true democracy, private funding of political parties should be made illegal. The government should create infrastructure and policies so that all political parties get equal opportunities for making their policies, views and programmes known to the people free of cost.”

Some economic analysts underlined increased provisioning for the quarter against bad loans. Punjab National Bank was among the five that reported a profit in the last fiscal. According to the PNB’s Annual report 2016-17, in terms of bottom line parameters, the bank’s operating profit stood at `14585 crore during FY’17 and net profit at `1325 crore. In the light of PNB frauds, the unstated question is, can the results of the other 20 banks be taken at face value?

RBI Governor Urjit Patel, speaking after Punjab National Bank’s fraud, said it was not possible for the banking regulator to prevent each of such incidents. He urged the government to strengthen the Banking Regulation Act, 1949 to give the regulator enough teeth to regulate state-run banks. Patel also emphasises in his speech, “It is an open issue whether centralised government control alone can be effective enough at designing and implementing governance of banking franchise comprising over 2/3rds of the sector’s deposits and assets. It would be better instead to restore regulatory and market discipline.”

Malabika Roy, Professor of Economics in Jadavpur University, Kolkata also spoke to BE regarding performance accountability in financial sector. She says, “The recent bank frauds along with the sense of impending crisis due to the rising NPAs have resulted in a massive loss of faith on the banking sector among the public. But the bank fraud involving Punjab National bank, Nirav Modi and Gitanjali Group alone is not responsible for the sense of doom.  Two other factors have also contributed to the sense of distrust and imminent crisis. First, is the fact that the source of the current serge in NPAs is mostly the large business houses. Secondly, the new Financial Resolution and Deposit Insurance bill (FRDI), 2017, has a bail in provision according to which in case of a bank failure there can be a cancellation or conversion of liabilities including deposit liabilities. This is an issue which is well discussed. An issue, which is less discussed is that under FRDI 2017 bill, a resolution corporation will be established, which will have the power to decide the amount of deposit insurance to be provided on deposits as well as  to make a decision regarding bail-in provision.  So performance accountability is a very important element to address the public perception of impending disaster.”

Roy stated her views as below:

l The answer is to the most obvious question of accountability is that the banks should be accountable primarily to the depositors/customers. But, since nationalisation, banks have been playing a very important role in social and economic development process; there remains a question of social accountability as well.

l The customers and the people in general need to be informed that transparency has been maintained and in case of frauds, the culprits have been identified and suitably punished. So dissemination of information is also important. After the investigation is complete the reports should be available on the banks’ website for public review.

l The investigation and prosecution should be swift, because there is a general impression among the public and with some justification that the investigation and prosecution takes so long that the end result is not clear and the persons responsible are allowed to escape.

l Stricter laws and investigation processes are required to counter the financial offences; again some steps are already in the anvil in the correct direction. But long term and consistent measures needs to be put into place and with public knowledge.

l Banks should also create a platform where the customers can express their views and opinions. So generally speaking, transparency is important but visibility of transparency is also important.

l In this context, in my opinion, the current FRDI bill, 2017 needs to be debated more in public forums, before placing it again before the standing parliamentary committee. Especially the views of the banking authorities and the RBI researchers should be disseminated among the public.

l Next we come to government’s role in performance accountability. On the one hand the elected government consists of the representatives of the people. So accountability to the public can be implemented through accountability to the government. But on the other hand, government representatives themselves are not found to be above corruption. Also time and again, government representatives are found to represent some strong interest groups especially financially strong interest groups. Given this scenario of distrust, in my opinion, the Reserve Bank of India should play a major role in implementing the accountability of the banking sector, and measures should be taken to keep the Reserve Bank of India largely independent of the government’s influence except in cases of greater social concerns.

l Reserve Bank of India should also maintain the same level of transparency and information dissemination as is expected from the banks.  The current NPA ordinance of 2017 is a step in the right direction. Another important role that Reserve Bank of India should play is on educating the public about savings and investment choices available to them and the risks involved in each case. There are many information channels available to the large investors, but small investors lack the necessary knowledge to make an informed choice. Here RBI can play a very important role. Financial literacy among the small investors together with proper information dissemination will also help assuage the sense of crisis and unnecessary panic among the public.

Business Economics spoke to Thomas Franco, General Secretary of All India Bank Officers’ Confederation (AIBOC).

Q. What are the reasons for the present crisis in the banking sector in the light of ‘performance accountability,’ particularly after the occurrence of PNB fraud?

A. The present crisis is due to the policies adopted after 1991. These policies are helping a minuscule minority which is the large corporates. The policies ignore the vast majority of Indians which include the farmers whose access to credit has declined dramatically. 11643 borrowers enjoy 38.4% of total credit. Performance accountability has to be for top executives and board of directors including those from RBI and the Finance Ministry. Though the Parliamentary Standing Committee on Finance recommended certain steps to enhance accountability and transparency, the government and RBI have not taken them. RBI should also improve their supervision and accept accountability for their action.

Q. What should be the government’s role to arrest the lack of performance accountability?

A. The government should immediately appoint officers and employees in the banks who can play the watchdog’s role. Instead of going to foreign consultants, they should approach IIMs to do detailed analysis and give their recommendations.

Q. How far does bank management play a role in ensuring accountability and transparency?

A. Bank managements have an accountability policy and performance matrix but their supervision has become weak due to shortage of man-power and technology which is allowing the fraudsters to manipulate the system. In case of the Nirav Modi scam, it was the RBI which had introduced the Letter of Undertaking (LOU).