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Frauds, failures and bad banking decisions

First it was the courts, then the Parliament’s standing committee on finance and now the Central Bureau of Investigation (CBI). One hopes it won’t be the Comptroller and Auditor General (CAG) next.

I am referring to the regular public bashing of bankers and the Reserve Bank of India (RBI) for the steep increase in bad loans.

But it is important for the courts, investigators and public auditor to understand that the rise in the number and amount of bad loans was largely on account of the exuberance in global and Indian markets from 2004 to 2008 and the equally steady downturn from 2009 till date.

Estimates of growth and pricing of products to capture market share during boom years may seem like instances of bad commercial judgement on hindsight, but these decisions ought not to be confused as fraud or malafide decisions.

The Supreme Court’s observation on February 9 (slamming bankers and the RBI for loan write-offs), while hearing a 13 year old case involving HUDCO, reveals an insensitivity to the essence of business and banking. Bad loans happen in the regular course of business. The incidence of bad loans arise when economies go from upswing to downswing. It isn’t as if bankers suddenly became corrupt and it is important for the courts, the media and the investigators to understand that.

Today, the CBI director faulted a gathering of bankers for not declaring Kingfisher a “wilful” defaulter in good time. Again while the comment is made with good intent, bankers can point to a zillion cases where it is impossible to know when to pull the plug. Nor do banks benefit from calling a defaulter “wilful”.

As is happening in the Kingfisher case, instead of saving up their legal fees and bandwidth to extract compensation from Vijay Mallya, banks are merely running from court to court to prove him “wilful” defaulter. They have to then fight more cases in the debt recovery tribunals and through layers of courts to reclaim what is left of Mallya’s assets.

It is important for the government to ensure that the CAG doesn’t follow in the CBI chief’s footsteps. That will bring to an end the incipient economic recovery with lightning speed.

The finance ministry and the RBI are today patiently putting in easier rules for bankers to sit with beleaguered promoters, asset reconstruction companies, private equity funds, stressed asset funds and professional management agencies to turn around companies that can be saved and sell down assets of companies that can’t be.

Every sell-down of a 100 rupee bad loan for 50 rupees can be described as fraud or as a sensible business decision that saved the bank at least half its money. If even one bank is summoned to the CAG’s office for a wrong loan to a steel company, the entire process of recovering loans or turning around sick companies can grind to a halt.

No banker will ever sanction a single loan or try to save a single struggling borrower. Afterall there is no penalty for inaction even though that can actually destroy many more millions of rupees than one bold decision to help a struggling promoter. It is important for the CAG’s office to realize this. An over-zealous public auditor is exactly what the nation does not want today.

In a way it is good that the clean-up has originated from the RBI. Given the central bank’s image of integrity, it can take a few public punches for sloppiness, provided that saves public sector banks from post-facto investigation of commercial decisions taken a decade ago under vastly different circumstances and expectations.

It is also good that a former auditor, of unimpeachable integrity is roped in as the chairman of the bank boards bureau. Vinod Rai will perhaps be in a better position to help the finance ministry and the RBI reason with the CBI, the CAG and the courts about the big difference between frauds and commercial decisions that turn unviable because of changed business cycles.