‘If you owe the bank a hundred thousand dollars, the bank owns you. If you owe the bank a hundred million dollars, you own the bank.’ This American proverb alludes to the dangers of corruption, nepotism and cronyism in the banking sector. Often ignored, corruption in the financial services sector can have deep and far-reaching consequences for an economy, and in an increasingly interconnected world, the entire globe.

According to the RBI, PSU banks along with the latest PNB scam reported loan frauds of Rs 73000 crore These are reported frauds. Probity in the conduct of business by banks is crucial given that they deal with public money. Corruption by banks in the manner of giving loans for extraneous considerations and possibly evergreening or restructuring bad loans could lead to the build up of non-performing assets in banks, tie up capital and prevent fresh credit offtake.

Solutions needed are:-

Banking sector:-

• Adequate auditing and internal control
• Strengthening internal processes to monitor and mitigate risks
• An emphasis on ethics should also be placed on the recruitment process and career promotion mechanisms, as prescribed by the Financial stability board.
• Assessing whether a bank has a sound risk culture and proper internal controls
• Supervisors should check that mechanisms are in place and ensure that the necessary checks and balances are in place throughout the organisation, as well as proper accountability and transparency provisions.
• A process of virtual de-nationalisation of PSU banks, at least at the operating level, has to be the first step.
• Empowering bank managements and securing their independence from political interference while enforcing strict accountability for lapses.
• RBI formed a committee that made a host of recommendations to improve governance, including competitive recruitment and remuneration, fixed tenures for bank chiefs, clawback of bonuses when dubious evergreening is detected, etc
• Include embedding within performance metrics the performance of loans disbursed under the management’s watch and making their remuneration contingent on this by penalising management for non performance of loans
• Holding up promotions for deterioration in quality of loans and linking promotions to recoveries. This will bring accountability and disincentivise collusive behavior
• Further, despite fixed tenures, management should be made responsible for loans disbursed in their time if they become non-performing even after they are transferred .
• In addition, there must be tighter rules governing the conduct of bank personnel in both private and public sector banks.
• Also a group ethical officer post is necessary in all banks to ensure integrity in the employees.
• Boards also tend to have ex officio nominees to the government rather than independent experts that can provide ‘tone from the top. This needs change.

Government:-

• Also strengthen the corporate governance framework by requiring that the governance arrangements include an organisational structure with clear reporting lines, control mechanisms and remuneration policies that promote sound and effective risk management.
• Private ownership effectively gives the RBI powers to punish managements and boards of banks when they fail to perform their key role of managing risk.
• Any instance of crony capitalism and influential business man involved need to be punished severely to gain public trust.

It is time the Centre, the major shareholder in these institutions, takes serious steps to translate this intent into action. To restore the depositor’s faith in the banking system, the government, the RBI and the judiciary must ensure that prompt and salutary action is taken.