Over the past few years,  public sector banks have faced a barrage of criticism because of their pile of bad loans and recently because of the discovery of frauds, comparisons have been made with some of India’s top private banks, not just in terms of operational efficiency and lower bad loans, but also on governance.

Conflict of interest:-

Conflict of interest is a situation in which an individual has competing interests or loyalties.  A conflict of interest can exist in many different situations.

 For instance a public official whose personal interests conflict with his/her professional position. Instances of the largest shareholder appointing himself as CEO, deciding his salary and then appointing his son to a key post and higher royalties to the parent company are some of the serious conflict of interest issues in India which don’t  receive necessary attention.

Conflict of interest is seen  as a moral issue and not strictly a legal one accompanied by criminal culpability in India so it is hardly surprising that blatant violations are virtually seen every day.

Conflict of interest situation if left unchecked can hinder or even cause the collapse of the banking sector. It happened in 2008, when the global financial markets collapsed under the massive weight of the numerous low quality collateralised debt obligations (CDOs) that were issued.

At investment banks, analysts are tempted to tailor reports that keep the underwriting business going, at the reputed consulting firms, a favourable audit report could provide a gateway to more (non-audit) business have been affecting  interest of customers who expect fair investment advice.

 Banks or financial entities, which are granted a licence by the banking regulator, can leverage and lend the public deposits that they mobilise. It is a business to which trust and confidence are central, and any erosion of which can lead to a run on deposits  as has happened earlier in India and elsewhere in the world.

The  fallout effect of conflict of interest is often detrimental to economic growth and dampens market forces for instance fall in the ICICI bank shares in the stock market by 6% after CBI enquiry into Videocon loan.

Better oversight, higher levels of corporate governance, vigilant groups such as credit-rating agencies, consumer watchdogs, shareholder activism etc have helped. RBI is planning to create a fund from which payments will be made to rating agencies to replace the existing practice wherein the borrower or the issuer company pays the agency rating its credit worthiness.

The priority must be to frame a modern law relating to conflict of interest, along the lines of what exists in the statute of the other countries like the United States and also ensure them to their work ensures ethical governance.