These two incidents point to one malaise that has been plaguing the Indian banking system, particularly the public sector banks which roughly have 70% market share in assets: Corruption. Referring to corruption among government officials, Chanakya, an India economist of the fourth century, in his political treatise the Arthashastra, had said detecting corruption among revenue officials is as impossible as knowing when a fish is drinking water. The same holds true for the bankers. They are in an industry where money is the raw material and it is not easy how they use their official position to make money for themselves.
Bhargava had started her banking career with Punjab National Bank as a management trainee in 1977. In February 2014, she sought voluntary retirement, citing health reasons, 10 months after she took charge of the Kolkata-based bank. Her tenure would have ended a year later. Citing two unidentified bank officials, a newspaper report then referred to a Rs 100 crore loan to a real estate developer despite opposition from directors of the bank’s board as the reason behind her quitting in a huff.
She had mostly been on leave ever since the bank’s board met on 7 February 2014 to take into account the December (2013) quarter earnings in which it reported a Rs 1,238 crore loss after it set aside money to provide for its rising bad assets. My column at that time questioned: ‘Is Archana Bhargava a victim of internal politics or a martyr?’.
In UBI, she allegedly cleared loans overriding the board’s dissent and restructured troubled accounts without assessing the viability of the projects. Incidentally, her stint as an ED in Canara Bank was quite turbulent. S. Raman, then CMD of Canara Bank and now a director at capital market watchdog Securities and Exchange Board of India, had found her interfering with the auditors of the bank and wrote to the finance ministry to get rid of her.
This is not the first instance of CBI looking into corruption in this sector. In August 2014, the agency arrested Sudhir Kumar Jain, the then CMD of Syndicate Bank, for allegedly taking a Rs 50 lakh bribe. His brothers-in-law were allegedly involved in the mechanics of the pay-off. At that time, I wrote a two-part series— ‘How to deal with corrupt bosses of state-owned banks’.
The latest developments once again have drawn me to the issue of corruption among public sector bankers and the modus operandi. (I am no way suggesting that all private bankers have impeccable integrity.) Like in any other profession, here too a few are corrupt (but it has to be discussed as banks deal with public money and trust) and most corruption cases relate to credit decisions.
Typically, a corrupt boss uses senior executives such as general managers and deputy general managers for sanctioning loans to undeserving borrowers and pockets a small portion of the loan amount. It could vary from 0.5% to 2-3%, depending on the profile of the borrowing company. This means for a Rs 100 crore loan sanction, the “earnings” could be Rs 50 lakh to Rs 3 crore. The money could be paid in cash or in an overseas bank account (one banker is known to keep this money in his own bank overseas, through the so-called 'hawala' route).
In most such cases, the pressure on giving loans without proper risk assessment mounts on senior executives just ahead of their interviews for promotion. If they don’t oblige, the risk of missing promotion is high. The senior executives also run the risk of being transferred to places not to their liking if they reject a loan proposal, recommended by the boss.
The current boss of a government-owned bank has recently told his executives to sanction loan proposals that he recommends (ofcourse, verbally) and not bother about whether they will turn bad. His philosophy is: As long as the loan book is growing, no one should bother about non-performing assets as bad loans as a percentage of overall loans can be contained through aggressive loan growth.
It’s another story that the corrupt bank bosses do not use their subordinates only for clearing loan proposals that should not be cleared. Once a senior executive of a bank had to spend almost an entire day searching for a particular brand of dog biscuit in Bangalore markets for the dear pet of the bank chief.
Different Shades of Grey
There are many ways of making money. For instance, there could be “consideration” behind the alliances for selling non-banking products such as insurance and mutual funds. Also, many brokers and consultants involved in sourcing loans for banks (not all banks entertain such intermediaries) are known to offer a cut to the senior bankers who sanction loans. One such broker has confided in me that these days, many prefer “skin” (women) to cash for fear of being caught by investigative agencies.
I am also aware of at least one senior banker who has employed a “portfolio manager” to manage his money. The manager collects money on the banker’s behalf from borrowers and even helps distressed borrowers by offering short-term loans from the “fund” he manages to keep the loan as a “performing” asset. Such loans can continuously be milked as only a performing asset or loan can get fresh disbursements of money from the bank and such disbursements keep the money flowing for the portfolio he handles. When a loan turns bad, the bank cannot give more money to the defaulting borrower. If one thinks that such “transactions” are restricted only to the higher level, one is mistaken. Junior officers too are involved in “deals”. Such practices are particularly prevalent in small unsecured loans. Even junior officers enjoy reasonable freedom to choose the borrowers who do not need to offer any collateral to get such loans and often default.
Gifts Galore
While corruption remains a hot topic, it may not be a bad idea to look at the gift culture prevalent among most banks. During Diwali, relatively junior officers of banks are seen hailing cabs to home in distant suburbs in Mumbai as they cannot carry the dinner set, thermos and other such items in crowded local trains.
The nature of the gifts changes in accordance with the profile of the bankers. While the junior-most employee in a branch may have to be happy with a Prestige pressure cooker or a Titan watch, gift vouchers, Mont Blanc pens, fancy mobile phones, iPads and Kindles, Nalli sarees, silver utensils, gold coins and jewellery make their way to the cosy cabins of senior officers in branches and other offices managers.
There are a few banks which do not allow entry of any gift in their corporate offices but I am not sure whether there is any code of conduct for acceptance of gifts framed either by individual banks or the industry lobby, Indian Banks’ Association. Of course, the service regulations spell out the do's and don’ts but not everybody cares for them. Also, the prevention of entry of gifts into the corporate office does not necessarily mean that the bankers are not accepting gifts. Once the CMD of a south-based bank got upset seeing many gifts in the boot of the official vehicle while leaving for the airport from a meeting with the borrowers in an eastern city; in presence of all, the bank’s manager of the zone was asked to remove them. Later, the same zonal manager was entrusted with the task of delivering them to the CMD’s house.
And this culture is not confined to the bankers alone. Many government nominees on the boards of the banks too are afflicted with greed for gifts. One such nominee on the board of a large public sector bank once wished to buy a pullover during a meeting in Mumbai as Delhi winter was cruel that year. Since he did not have the time to visit a shop, the bank arranged to show him four fancy pullovers fetched from a departmental store, giving him choices. The director liked all four and asked the CMD’s secretariat to pack them for him.
Instances of borrowers taking care of a senior banker’s child’s education overseas or picking up the tab for wedding reception of the daughter and even honeymoon at Bali are not rare. Similarly, a real estate firm may not mind selling a flat to senior bankers at a hugely discounted price to ensure speedy appraisal of the loan process. There are also borrowers who offer “annuity” to bank chiefs after their retirement to express their gratitude for the support extended to them in appraisal of loan proposals and disbursements of loans.
The annuity comes in the form of annual holidays, chauffeur-driven cars and guest house or hotel accommodation at certain cities. The “give and take” culture between a few bank chiefs and corporate borrowers start with the appointment of the person as managing director or executive director. Till recently, the appointment process was opaque and many in the industry say that top seats could be bought. Typically, borrowers pay the money involved in such deals and the banker returns the favour after assuming the office.
How to Change the Culture
Why do some bankers entertain such things? Will they change if the government raises their salary and perks manifold? Indeed, public sector banks get far lower salary than their counterparts in private sector, but at the lower level, employees of public sector banks earn higher than private bankers. One way of raising the salary of senior public sector bankers could be allowing them to monetize their perks. Stock options could be another good incentive. In most cases, the senior bankers become a victim of greed out of insecurity post retirement when their lifestyle takes a big hit. Also, there is no uniform culture among all public sector banks. Some banks are known for transparency and free flow of information and some are not.
There has been no survey on the level of corruption but I would imagine two out of 10 senior bankers love wealth and they would not change even after their salary is raised manifold as corruption is in their DNA. Another four, who do not suffer from any ethical dilemma in accepting favour in the form of children’s education and wedding expenses being taken care of and hefty discounts for buying costly flats will stop the practice when higher salary and perks give them security. The rest believe in living within their means and are committed to a high ethical standard.
Market-related salary, strict surveillance and exemplary punishment for corruption could change the scenario for the better.
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* This column originally appeared in Mint
About the Author:
Tamal Bandyopadhyay is one of the most respected business journalists in India. Currently, he is a Consulting Editor of Mint, writes a weekly column on Mint – Banker’s Trust, which is widely read for its deep insights into the world of finance. He is also an Adviser on Strategy for Bandhan Bank. He has authored two best sellers on finance, `A Bank for the Buck’ and `Sahara: The Untold Story’. His latest book, `Bandhan: The Making of a Bank,” a Penguin publication was released in June.
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