The message to banks

Creating a distinction between malfeasance and mistakes helps

Finance minister Nirmala Sitharaman has said that bankers need not fear the three Cs — the Comptroller and Auditor General (CAG), the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI). She asked them to take decisions, “without fear”, and assured them that no case will go up to CBI without the banks’ authorisation. Ms Sitaraman added that CBI shall be careful of the distinction between “genuine commercial failures and culpability”. The FM’s statement builds on Prime Minister Narendra Modi’s assurance at the Hindustan Times Leadership Summit earlier this month, when he exhorted bankers to take decisions without fear.

The finance minister Nirmala Sitharaman’s statement builds on Prime Minister Narendra Modi’s assurance at the Hindustan Times Leadership Summit earlier this month, when he exhorted bankers to take decisions without fear (PTI)

These remarks are significant because of developments in the banking sector over the past decade. Public sector banks engaged in reckless lending during the boom years of the last decade and earlier in this decade. This was either due to errors in decision-making or political pressure. Many of the projects for which lending was done, however, failed to move ahead. This created a twin balance-sheet crisis, where banks were stuck with bad loans and big companies were straddled in huge debts and unfinished projects. The Modi government, in its first term, to its credit, recognised the problem — although belatedly. It took steps to recapitalise banks and brought in the Insolvency and Bankruptcy Code to enable the exit of companies and recover capital, even if partially. Already low on capital, bank officials feared being hauled up for credit-related decisions. The mood in banking — and more generally, in economic decision-making among bureaucrats — was that it is more prudent to “play safe”, do little, rather than risk retribution.