Is Ministry of Finance (MoF) controlling Banking without skin in the game?

The Prime Minister forewarned the Nation on 7th February that the Banks gave bad loans for years without due checks and balances in which repayments are not forthcoming or long overdue resulting into 82% Non-Performing Assets (NPA in the common parlance). Within a week of this speech one of the major Public Sector Bank PNB files a complaint in the CBI of fraud by a leading diamond merchant of more than 11 thousand crore rupees. Over a few weeks, the extent of this fraud spiraled and it became quite clear that this kind of fraud is not a one-off case but seems to repeat itself with an alarming frequency.

In this backdrop, all the fingers are pointing towards bankers and independent auditors, but that is missing the point. In order to have a dispassionate and informed standpoint let’s examine the impact of MoF on Public sector banks (PSBs) in last 10 years by looking at the audit and vigilance reports.

Comptroller and Auditor General (CAG) is the supreme constitutional body responsible for independent, credible, balanced and timely auditing and reporting on public finance and governance. Public sector banks, however, have independent auditors and CAG audits MOF, the owner of PSBs. Only one audit report created in 2017 by CAG is available on its website on the issue of recapitalization of PSBs. This report is based on the scrutiny of files and documents of MOF and covers a period of 10 years (2008 to 2017). This fact is quite revealing that period of reporting is pretty long on such an important aspect of finance.

The report points out that MOF infused Rs.1,18,724 crores in last 10 years without following any objective or specific criteria to recapitalize banks. Sometimes it was solely on the basis of information received from the PSBs without any independent verification by the MOF. At other times, although parameters were fixed for assessing the capital requirement of the banks, these guidelines were ignored. The report also reveals that corporate lending contributed the maximum extent of NPAs and the recoveries of these bad debts never matched the write-offs, thus draining public funds out of the financial system. The basic principle of financial propriety expects public officers to exercise the same vigilance with public money as they would exercise in respect of expenditure of their own money. It is quite evident that this prudent approach was ignored in infusing funds in the banks.

Coming to the vigilance reports available on net, a record number of more than 46,000 punishments were given during the period of 10 years from 2007 to 2016 by Central Vigilance Commission (CVC), which is the apex vigilance institution, free of any executive control. As a result, various categories of bank employees got punished by the MOF for frauds and other corruption. It would be quite interesting to know that whether any of the PSB bank board members who takes decision on lending high value loans and their write offs were penalized by MOF in the last 10 years. It seems that this is unlikely, and so PSB board members, their directors, or finance ministry officials on bank boards, while deciding the issues of crores and crores worth of public funds do not incur any risk even when they take erroneous decisions.

Banking is all about risks. We all may differ on whether we have too many rules and regulations or too few of them, but it should be clear that officials who use public money should never ignore the basic principles of prudency. However, based on the last 10 year reports from audit and vigilance and these incidents of fraud have shown, this is not what happens in practice, and the officials tend to take undue risks, which cause a lot of pain to the common man.

Ultimately, the only way to ensure that officials do not take undue risk is they have to share the risk themselves so that they can be effectively sued if they take decisions which are against the larger interest of the society.

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