Bankers in Dilemma

Two contrary banking developments, in a single day, shock even the banking experts
Bankers in Dilemma
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At a time when the banking sector is facing a huge slowdown in credit off-take, banks have been working overtime to beat this slowdown, which otherwise is a huge cause of concern for the banks as well as for the economy on the whole. This time, the banks have been capitalizing on the festive occasion to make all out efforts to pump as much money as possible into the system through various ‘decorated’ loan schemes to create a win-win situation for all (banks, consumers & the country’s economy).

Pertinently, the slowdown in credit growth has been at around 5.3 per cent in the financial year (FY) 2021. This percentage is the lowest in the last three-four years. Weak consumer sentiment, lack of investments from the private sector and low capital expenditure by corporates are the key factors in the slowdown in credit off-take.

Here, it’s worth mentioning that the government launched a nationwide Credit Outreach Programme on October 16, 2021. According to the finance ministry data, so far 13.84 lakh loans totaling Rs 63,574 crore have been sanctioned through 10,580 camps held across the country as of October 31. The data reveals that as much as Rs 21,687.23 crore in business loans were sanctioned to about 3.2 lakh beneficiaries, while vehicle loans worth Rs 4,560,39 crore were sanctioned to 59,090 borrowers. Housing loans worth Rs 8,994.25 crore were sanctioned to 41,226 borrowers as of October 30, 2021. Besides, over 7 lakh farmers availed Rs 16,734.62 crore agriculture loan in the last fortnight under the initiative.

Remarkably, most of the banks have announced festival offers at concessional rates of interest and waived processing charges.

Now, when banks are busy in adding flavor to this festive mood, two major contrast developments hitting media headlines on Monday (November 1) put the bankers in a dilemma. First, it was a major reprieve for the bankers when the finance ministry announced a ‘staff accountability framework’ to protect honest bank employees from being penalised in case bonafide decisions involving loans up to Rs.50 crore go wrong. The framework makes it clear that only genuine decisions and not those involving malfeasance or malafide intentions will be covered under the norms.

The announcement of this framework serves as a confidence booster for bankers, particularly for those who were exercising extraordinary caution while dealing with a loan application. This framework serves as a vaccine dose to dispel fear of being held responsible if a loan goes bad. For the past few years, bankers have been at the receiving end at the hands of the government for being ‘responsible’ for an unprecedented surge in bad loans. This forced the majority of them to resort to conservative lending where deserving as well as undeserving loan applicants were measured with the same yardstick. This attitude fuelled slump in credit off-take.

At the moment, all bad loans are viewed with suspicion as many reputed bankers in league with outsiders in the corporate world were caught involved in crony lending and a series of malpractices. The banking sector saw thousands of crores in the credit portfolio slipping into the bad loan category. Even as the frontline culprits were booked under the law, the bank officers down the line, unaware of the malafide intentions of their superiors, also faced the heat of investigations. Most of them were even held accountable for none of their faults as the accountability system in place was not allowed to exonerate them.

To be precise, the framework now makes a promise to the bankers that they will not be punished just because a loan approved by them for good reasons turns bad. Here, the banks need to take the ‘staff accountability framework’ as an opportunity to revisit their analytical tools so that their credit decisions won’t no longer be viewed with suspicion.

Meanwhile, boarding the festive bandwagon with loan schemes driving consumption is in line with the present demand, the banks need to shed fear psychosis now that an accountability framework has been put in place to ease the lending decision of the bankers.

Now, let’s come to the second headline, which is in contrast to the relief loaded in ‘staff accountability framework’.

Arrest of former State Bank of India (SBI) chairman Pratip Chaudhuri on complaints from a loan defaulter has shocked the banking industry. This incident is enough to get the bankers on back foot in lending matters despite assurances from the finance ministry’s framework that they won’t be hauled up for approving a genuine loan which slipped into non-performing category (NPA). The incident has direct bearing on the efforts of the bankers in multi-billion-dollar recovery initiatives currently being worked out to stem the decades-old rot in the banking system.

Notably, the case has a link to recovery of bad loans and refers to a Jaisalmer hotel project, financed by SBI in 2007. The loan slipped into the NPA category in 2010 and was sold to an asset reconstruction company, Alchemist Asset Reconstruction Co, in March 2014. Chaudhuri had retired from the bank six months before the sale of loans, in September 2013.

Precisely, the incident has made the bankers nervous as it can be gauged from the reaction of some top bankers against the move. For instance, a former SBI chairman Rajnish Kumar termed the arrest as a case of high handedness. “Prima facie, it seems to be a case of misrepresentation of facts and singling out of an individual, who held a high position, to seek publicity,” Kumar told the media.

Interesting observation in this case is that the arrest of the former top banker has been made on a complaint filed by the defaulter, which is not going well down the line in the banking sector. Experts hurried to believe that the system continues to be “gamed” again by defaulters despite all efforts by Modi government to improve transparency and introduce accountability.

The role of law enforcing authorities while handling banking matters, especially of loan defaulters, bears several question marks. Experts have rightly stated that some lower level judicial and police officers who have no clue of how banking works take these high-handed decisions to please higher-ups.

This time demand for accountability of law enforcing authorities in mishandling the bank cases and causing huge reputational damage to the elite bankers of the country has once again gained momentum. A CEO of a bank has been quoted by the media saying, “There is no punishment for wrongful cases and judgments that can destroy careers. Law enforcement agencies are not acting with responsibility and this will have economic repercussions.”

To conclude, the above stated two developments are in contrast to each other. First, you are giving an assurance of a relief from harassment to the bankers through ‘staff accountability framework’ and simultaneously you are infusing nervousness of top order among the bankers by arresting a former SBI chairman on a loan defaulter’s complaint. It’s a dilemma for bankers as they would continue to fear even for their worthy lending decisions.

(The views are of the author & not the Institution he works for)

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