‘Not all loan defaults are wilful, nor all lending corrupt’

IN AN attempt to caution the banks against becoming alarmist when it comes to lending, former Comptroller and Auditor General (CAG) and chairman of the newly formed Banks Board Bureau (BBB) Vinod Rai said that banks should not be carried away by “cacophony of uninformed voices”.

Rai who was speaking at the 12th Annual Convocation of the National Institute of Bank Management (NIBM) called for public sector banks to adopt innovative compensation schemes of its executives to compete with the foreign and private banks.

“Not all loan defaults are wilful and not all lending activity, even if it is to salvage such stressed accounts, can be branded as corrupt practice or criminal misconduct. It is this precaution that we will have to take not to create a larger scare in the sector,” he said. Banks, he said, need to accelerate lending activity taking care to ensure that proposals are professionally appraised and transparently analysed. “If these basic principles are ensured we will succeed in creating a new era of reform which will have technological innovation and financial professionalism supporting an economy waiting to rapidly accelerate its growth,” he said.

The issue of stressed assets of banks, Rai said, need to be dealt with urgency and diligence. “We need not debate ad infinitum the escapades of one or two industrialist,” he said. Rai’s comment comes at the backdrop of the recent issuance of non-bailable arrest warrant against Vijay Mallya by the Enforcement Directorate.

Rai said that the normal loan advancing activity should not come to a standstill based on the experience of a few cases of mismanagement. “It needs to be recognised that all loan defaults cannot be viewed as corporate frauds and all such decisions of banks to provide loans as acts of malfeasance,” he said. Loan defaults, Rai said, occur for a variety of reasons and defaults merely amount to a breach of contract and not necessarily are criminal in nature. “It would attract criminal prosecution only if fraudulent or dishonest intention is established,” he said. The Reserve Bank, he pointed out, has provided very clear guidelines for establishing a wilful default. Unless intent is established, decision by banks to lend money to revive or turn around a stressed asset he said should not be provided a ground for suspicion.

Public sector banks, he said, need to innovate on compensation packages. “It is acknowledged that the public sector has limitations on the score of compensation package per se. However, and adequate reward structure around ESOPS performance linked incentives and other benefits can surely be designed to attract the best talent to the public sector,” he said.

The BBB will help the government appoint heads of public sector banks and also advice on banking reform.

The public sector banks of late are in news for the shooting up of bad debts and nonperforming assets.