Bhushan Steel to Dena Bank: Raft of loan scams could gum up works for banks, corporates

A bullet train with “Bank Scams” emblazoned across it is headed the Modi government’s way. It has all the potential to clog up the arteries of the economy if not handled proactively by the finance ministry. Consider what is going on.

First, we had the Bhushan Steel bribery scam for which a Syndicate Bank chief and a Bhushan Managing Director have been arrested and sent to custody for questioning. The Central Bureau of Investigation (CBI) is probing the scandal.

Second, Dena Bank and the Oriental Bank of Commerce claim to have been targeted for fixed deposit-related frauds where large amounts deposited by some companies, including the Jawaharlal Nehru Port Trust, were moved to other accounts, possibly through forged letters from the original depositors. The CBI is investigating.

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Third, CBI Director Ranjit Sinha has sought details of all cases being investigated by the Directorate of Revenue Intelligence in which companies have allegedly overinvoiced imports, leading to possible losses for the banks involved in lending to them.

Fourth, the Supreme Court-appointed Special Investigation Team (SIT) on black money headed by former judge MB Shah is said to have filed a preliminary action taken report to the top court in which it has indicated that real estate and mining-related activities were the biggest generators of black money. Banks have big exposures to the realty sector.

The common link to all these four stories is that we are heading towards a situation where the courts and the investigative agencies are going to get increasingly involved in probing banks, companies and even government decisions involving them.

This is a situation tailor-made for another decision-making paralysis, this time at the banking and corporate ends. Bank finance is the lifeblood of an economy, and if bank managers are suddenly going to be looking over their shoulders and sitting on decisions for fear of the CBI or courts, there is going to be a huge lending freeze looming ahead.

Neither the CBI nor courts are particularly well-equipped to judge financial sector decisions and could have a tendency to presume routine practices are scams when they may just be bad decisions. This is not to say there were no scams, but we need them to be probed by financial-literate investigators.

Moreover, if the courts are also going to be chasing corporate crooks and officials who helped them, we are going to have another round of bureaucratic paralysis that was just showing signs of dissipation after the installation of the Modi government.

Admittedly, the whole system of top appointments in banks has been driven by a degree of corrupt practices, with some top jobs being sold to the highest bidders - who then have to find ways to amortise their “investments” by accepting corporate bribes and ever-greening of bad accounts.

The Modi government is, therefore, taking a relook at how bank appointments were made during the UPA regime, and how the selection of future candidates can be insulated from crony and political pressures. A new system and new incumbents will take some time to put in place, and meanwhile the investigative agencies and courts may gum up the works.

The finance minister is reported to have approved a draft cabinet note for putting all bank shareholdings into a holding company - both to optimise the need for additional capital and to insulate bank managements from political pressures.

Since these changes will need legislation, even if the cabinet approves the proposals quickly there will be legislative delays. The government will clearly have to get this done through an ordinance since parliament will not meet for the next three months till the winter session begins.

Both Arun Jaitley and Narendra Modi have to act fast to ensure that banks do not have the CBI and courts running all over them just when banks have to step up to the plate by improving governance, recovering bad loans and access more capital from the markets. And resume the cycle of positive lending.

For the NDA government, these developments have the same potential to derail the economy that the 2G, CWG and Coalgate scams had during UPA-2. It had better watch out.

The government has to move proactively to protect banks even while removing the bad apples in the pack. While doing this, it has to caution the courts and the CBI from destabilising managements.