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The Inconvenient Investigations Into Banking


In “Rot at the Top”, Sucheta Dalal talks about the corruption in the Banking system. SK Jain’s arrest in a bribe case, where the promoter of Bhushan Steel and Prakash Industries were allegedly paying Jain Rs. 50 lakh to increase their credit limits.

This should come as no surprise to anyone; bank chairmen, vigilance officers and top executives have been “malleable” for ages. Rs. 50 lakh is nothing – the amounts paid over time would have been crores in many such instances. The CBI has never tried anything of this kind – but now, it does, and follows up with an investigation into IDBI Bank for lending to Kingfisher Airlines when its net worth was already negative.

Most lending of this kind can be justified. If Net Worth was a criteria no one should lend to Air India, or to many early stage companies which have no tangible assets. In fact, even Enron died because people refused to fund it – the lack of liquidity created insolvency – so a bank’s refusal to lend could be responsible for a company’s death!

But when this is used as an excuse to justify imprudent lending it becomes a nightmare. The fact is, and Sucheta brings this out, that even when it’s proved that a bank chairman is guilty of corruption, these bank managers don’t go to jail. She quotes the case of Homai Daruwalla, ex chairperson of Central Bank of India, who had a series of proven corruption cases, and still, got away with just a letter of displeasure.

This is what sucks.

We need to build a culture where if you screw up, you face the consequences and the consequences are severe enough to deter you, and others from coming even close to such behaviour. We started to do this only in cases like the Jignesh Shah issue, where the perpetrators of the NSEL scam have gone to jail. (Even there, the case isn’t complete)

Rajan supposedly wasn’t too pleased with government oversight on banks, but it was more likely a problem with the government threatening to use that oversight to push loans to politically connected people (as in, if you don’t lend, we’ll set the vigilance folks on you). Even then, the issue isn’t really that of too much oversight – it is that even when you catch someone red-handed, they get away.

Changing this is not without consequence. We will have to live with the failure of banks, and the fact that in many cases, the taxpayers will have to bail them out. (And here, in the spirit of justice, shareholders should get ZERO). There will be turmoil while these top level bankers and middlemen are arrested and jailed. Even the honest people will be worried, because it’s impossible to objectively detect if a bad loan is due to graft or just a bad turn of luck. This will slow down the banking system. Loans won’t come easy, all intermediation will go for a toss.

Without enforcement, things continue as they are but we have the distasteful consequence of allowing bad people to make money and live comfortably, just because we are afraid that if they were caught, we’d all suffer.

Without enforcement the story of growth is just the story of crony capitalism, and will eventually result in total lack of growth, like in Japan today. (In Japan, the biggest companies weren’t and aren’t allowed to fail, and so they hold the economy to ransom even after decades) We’re probably at an early stage of it. If a JP, RCOM, Airtel, Bhushan Steel, Jet Airways and others failed, the system would just stop dead in its tracks because the hit is large enough to drown many banks. Will we just live with it, or will we stop any “inconvenient” investigations?


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