At the recent 7th Conference of the Central Bureau of Investigation (CBI) with banks and financial institutions in Mumbai on “Combating Financial Crimes”, CBI director Anil Sinha came down heavily on banks for not reporting in time the frauds that have taken place in large corporate accounts. Kingfisher Airlines, being topical, was highlighted as a case in point. The statements made bad press for the banks; they may have given the impression that much has been hidden under the carpet and that things could have been better if the CBI had been informed in time. Alternatively, by delaying the suo moto action, the CBI may have added to “providing opportunities” and therefore also shares the blame.
The intention here is not to defend any fraudster. They must be booked and public money should be recovered. But one must also examine the perspective that organizations like public sector banks take utmost care to protect the money entrusted with them and are conscious of ensuring that the system is not exploited by miscreants for their nefarious ends. Credit decisions are taken at the highest level by boards and committees that are manned by persons of known integrity, professionalism and domain knowledge.
There is therefore an urgent need to understand, recognize and accept that principles and processes have to be followed—and often there are delays solely on account of this rather than intent. Recent news reveals that declaration of the wilful defaulter tag continues to be strongly contested by Kingfisher. When banks are finding it so hard to declare the owner a wilful defaulter, would it have been easy to declare him a fraudster? And on what grounds? Voluminous supporting documentary evidence is required to be submitted with the legal plaints and frequent adjournments happen. Decrees, as and when they are awarded, are again required to be executed through execution petitions. The Debt Recovery Tribunal also faces interference from civil courts that regularly grant stay orders. On the other hand, the DRT tribunal questions any out-of-court settlement. If one takes the legal route, the average time taken for recovery may be as much as five years, with an average of 15 adjournments.
Even after that, empirical evidence suggests that the money recovered is nowhere near a satisfactory level. All in all, the ground reality is that the judicial system appears more pro-defaulter than pro-lender.
There is also a widespread public perception that the Kingfisher Airlines owner’s lifestyle was a giveaway of his diversion of banks’ funds, but that banks did nothing regardless. It must be remembered that one cannot cry wolf each and every time some promoter has a flamboyant lifestyle—in fact the Kingfisher brand was consciously built up around the promoter’s lifestyle. It was marketing genius in the context of how brands are created. And it was also generally known that the gentleman in question had large personal means, quite a bit of which he inherited.
Further, lifestyle alone cannot be the trigger. The trigger would be the accounts going wrong—problems of extended cash flows and liquidity stress; irregularities in the accounts; stress on repayment and interest servicing; audits/inspections and follow-ups revealing improper end-use of funds; negative market information; problems in the industry; slippages in risk ratings. These are warning signals banks monitor and act upon. Even when such indications come to light, the usual process of rehabilitation is through the permitted regulation and standardized methods available to the banks. It calls for dialogue, getting business plans, validation through independent viability studies, debt restructuring and rescheduling and other related activities. Based on multiple underlying assumptions and data, the banks expect these to work and bring the company back on track.
As commercial organizations, banks can ill afford to call up loans at the first sign of account distress. This is especially true of public sector banks, which are an integral part of the nation-building process; jobs and much needed productive assets and resources are at stake. However, banks can still go wrong, not because of poor analysis and application but due to factors beyond their control—for instance, in the case of the airline industry, macroeconomic factors at that point of time. Had these not impinged on the viability of the airline, maybe the revised financial package could have succeeded in the revival with no brouhaha arising.
What therefore needs to be appreciated is that banks are not perpetrators or abettors of financial misadventures, but are victims. It is not correct to put them on the wrong side of the fence each and every time. This calls for a much higher degree of interaction and engagement between the two sets of institutions, both at the personnel level and at the information sharing level. Training centres, both with tje CBI and with the banks, should have programmes wherein CBI/bank officials can participate and share concerns and exchange views. The Indian Banks’ Association can also play a key role in providing required platforms. Such an approach, rather than apportioning blame, will be more constructive, create better understanding and a sense of oneness towards controlling the menace of financial crimes.
Let us usher in a new regime of collaboration between banks and the CBI, deterring wrongdoers rather than giving them an opportunity to exploit the gap in perception between the two institutions. This will be a far superior deterrent than what is available now.
Soumya Kanti Ghosh and P.M. Bhatnagar are, respectively, chief economic adviser and executive at State Bank of India. Views are personal.