Strengthening Governance in Indian Banks

The leaders of the Indian banking sector, along with their trusted advisors, have recently emphasized
the importance of heightened vigilance, governance, accountability, and performance at the board
level to the directors of both public sector banks (PSBs) and private banks. This counsel couldn't
have come at a more crucial time, considering that bank boards and top-level executives have been
somewhat shielded from the consequences of bad loans and bank frauds, leaving lower-level officers
to face the brunt of enforcement and police actions.

The RBI has followed up the general advice with a specific directive today that the settlement and
compromises of willful defaulters and fraud accounts should be decided only at the board level and
should not be delegated. This is a good start. However, the regulator needs to travel much further in
this initiative to fix more responsibility on the bank boards, including the independent directors.

To provide some context, in May 2014, there was a significant transition in the Indian banking
sector, commonly referred to as the 'Sengol' shift. During this period, the banks were grappling with
a substantial burden of bad debt, although the full extent of the problem only became apparent
when the RBI mandated the Asset Quality Review (AQR) for all banks in 2015. As a result of the AQR,
a group of major cases, sarcastically labeled as the 'dirty dozen,' were identified for intensive
recovery efforts. Additionally, the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016
played a crucial role in shedding light on the problem that had largely been concealed by the system.

Since then, the journey has been exceedingly challenging for the economy. In November 2022, the
Finance Minister revealed that banks had written off over Rs. 10 trillion in the preceding five years,
highlighting the gravity of the crony lending practices that had transpired earlier. It is astonishing to
witness how the system managed to absorb such enormous losses and eventually reach its current
state of health.

The banking sector in India has long been regarded with admiration, often becoming the envy of the
western world that typically sets the standard for prudential banking practices. However, in recent
months, its vulnerable underbelly has been exposed, revealing significant weaknesses and
shortcomings. While it is not an exaggeration to suggest that the worst may be behind us, it is crucial
to seize this opportune moment to implement comprehensive reforms in the administration of
banks, both at the operational and board levels.

This is a critical step towards fortifying the system and ensuring its resilience for the future.
The biggest challenge facing the banks is frauds, and the data available in the public domain explains
the gravity. The PSBs are disproportionately affected as compared to the others, bringing out the
environmental challenges afflicting them. One of the major aspects that cannot be missed is that
while there have been some instances of the CEOs of private banks being hauled up before the law,
like the case of Chanda Kochar and Rana Kapoor, little is seen in the context of PSBs. Just today (12th
June), it has been reported that the former MD of Bhushan Steel was arrested yesterday for the
alleged fraud of over Rs.56,000 Cr involving siphoning of bank loans principally taken from SBI and
PNB.

The question that should bother everyone is the level of culpability of the top management of the
said banks, as this level of fraud cannot be an isolated single event but a systematic execution that
could not have escaped the notice of the banks' system. Most top officials who were at the helm
when such loans were granted have since retired and serving in other boards and holding highly
remunerative offices. Also, this exposes the regulator's laxity with all the checks and balances in the
system of reporting by the banks, daily, weekly, monthly, quarterly, and everything else!

According to the office bearers of AIBEA, all the statistics reflects the action have been majorly
against the junior officers, and hardly any of the top officials of the PSBs.

The lack of transparency in sharing bank inspection reports by the RBI, except under court orders,
further exacerbates the issue of bad governance.

To address these challenges, several suggestions can be considered. First, banks should annually
publish the list of borrowers and non-performing assets (NPAs) on their websites, subjecting them to
greater public scrutiny and forcing vigilance in monitoring bad loans. In contrast to the traditional
notion of preserving bank secrecy to prevent public panic and runs on banks, modern circumstances
necessitate increased transparency.

The appointment of directors on bank boards should undergo a more transparent and objective
process.