Syndicate Bank is no one-off: Dear Rajan, here's what you must do to clean up public banks

The Reserve Bank of India (RBI) seems to have somewhat underplayed the Syndicate Bank scam as a one-off incident. At least, that is the sense one gets looking at the comments of Raghuram Rajan on the matter at a presser that followed the monetary policy announcement on Tuesday.

The governor cautioned that one shouldn’t extrapolate the matter to other public sector banks.

“I would emphasise that one should not extrapolate this to the entire public sector banking system and assume that all the problems in the public sector banks are because of criminality rather than other factors,” Rajan said.

He’s right.

Not all the problems in the public sector banks are because of criminality factor, but some are.

The RBI must acknowledge that besides the two much talked about problems that have led to the current bad loan pile-prolonged economic slowdown and severe delays in project clearances-interested party lending too has played a critical role.

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This could partly explain the ballooning pile of bad loans from corporate loans. Not all cases can be linked to the first two reasons. Given that, a failure to learn a lesson from the Syndicate Bank episode and foresee similar potential problems in other government banks will be a huge mistake, and a costly one.

The RBI has initiated a probe into the developments that began with the arrest of Syndicate Bank chairman S K Jain by the Central Bureau of Investigation (CBI) over the week-end. Jain allegedly accepted bribe from a few companies to classify their non-performing loans as performing.

At the RBI policy press conference, Rajan admitted that the Syndicate Bank episode raises troubling issues.

“So when there is banker judgment, you have to be careful about what genuine banker judgement is and what not-genuine judgment is,” he said.

The question is who should decide what is genuine and what is non-genuine in a financial system, where nothing happens right without regulatory pressure.

The fundamental factors that could lead to Syndicate Bank-like instances in other government banks are these:

**Credit appraisal, pricing and asset category classification:**Under current norms, credit decisions on large value loans at state-run banks are being taken by the credit committees headed by chairman of that bank.

Members of these committees typically include executive directors and general managers. If the board permits, the chairmen of these banks can sanction up to Rs 50 crore loans upon his personal discretion. Even for large value loans, say Rs 500 crore and above, where an apex credit committee typically takes a call, the decision of the panel gets significantly influenced by the chairman.

“Even though all the members are equally accountable, no one will typically have the courage to say no to a proposal, which is verbally okayed by the chairman,” said a senior banking industry official, on condition of anonymity.

“The corporate governance structure of state-run banks is weak,” said another banker, who recently retired from a large public sector bank. “There are chances that issues similar (to Syndicate Bank) can happen in other banks as well,” the banker said.

The members of the credit committees must be empowered to question the credit decisions of the chairman. Also, the representatives of government and the central bank on the boards of state-run banks should play a critical role in ensuring that norms are followed for the sanctioning of every high value loan.

The role of middlemen in the disbursal of corporate loans: The role of the middlemen in high value transactions is another reason why bank money is often directed to companies which do not necessarily comply with the eligibility criteria. In state-run banks, middlemen take active role on two fronts: at the time of high profile appointments and when large value loans are to be disbursed to shady companies.

Being the regulator of banks, Rajan can of course have his say on the appointment process of top executives at state-run banks in the backdrop of the Syndicate Bank scam. This can be done only by overhauling the system of appointing chairmen at public sector banks. The process should be left to a professional agency unlike the current practice of finance ministry short-listing candidates.

Widening gap in the compensation levels of private and government banks: During Subbarao’s regime, the RBI has pitched for higher salaries of executives at state-run banks at par with their counterparts in private sector. In the past, Rajan himself has highlighted the issue of government banks losing out talent to private banks due to poor compensation. But the gap still exists.

There is a huge difference between the compensation levels of executives at the same ranks in public sector and private sector and this, often encourages employees at government banks to go for unlawful means to make quick money.

With his much progressive steps and clear intent, Rajan has until now given an impression that he means business. It is high time that he takes steps to address the three key issues discussed above, for as writer and philosopher George Santayana once said, “Those who cannot remember the past are condemned to repeat it.”