Should CBI investigate actions of public sector banks? - YES ----By ---- BISWA SWARUP MISRA From Hindu Business Line
The banking business rests on the faith of people. Public sector banks enjoy greater depositors’ trust because of government ownership. There is inevitably an issue of moral hazard, if top functionaries, instead of pursuing corporate goals, work towards personal gain. How does one address this moral hazard?
The ramification of corrupt practices can be very serious. The collusion of banks and financial institutions in three major scams involving the stock market — Unit Trust of India, Harshad Mehta and Ketan Parikh — underscores this aspect. As those scams disclosed, the diversion of funds into shell companies assumed alarming proportions. The UTI chief was booked on criminal charges.
In the Deloitte fraud survey 2012, 73 per cent of the respondents, which included chief risk officers, chief compliance officers, heads of internal audit and senior management personnel in leading banks reported that deviation from existing processes and controls are the cause of fraud in banks.
Hence, discretionary practices do have a role in the banking frauds. Further, 37 per cent of the respondents in the same survey indicated that employees are hand-in-glove with fraudsters. Timely investigation and punishment can act as a good deterrent in such cases.
Or taking a more recent example, the loans extended to Kingfisher Airlines and the Deccan Chronicle group may also be worthy of scrutiny — was there a disregard for due diligence? The mushrooming of emu farms in Tamil Nadu is another case in point.
That said, there is surely room for the exercise of discretion in the conduct of business. The question is when the decisions assume a malafide nature.
It should be remembered that frequent enquiries into normal business decisions can impede the decision-making process.
However, discretion can distort the level-playing field for bank customers and impact the profitability of banks. In the past year, banks have witnessed a sharp rise in NPAs. While the higher NPAs can be attributed to the economic slowdown, we cannot rule out the role of discretionary power.
The issue is whether the discretionary power was exercised to extend or return a favour, or used to further the business interest of the bank.
If there is prima facie evidence of the former, there is nothing wrong in referring the matter to an investigating agency such as CBI. Bankers should pay heed to the adage, ‘Caesar's wife must be above suspicion’.
http://www.thehindubusinessline.com/opinion/should-cbi-investigate-actions-of-public-sector-banks-yes/article4102158.ece?homepage=true
Should CBI investigate actions of public sector banks? - NO------------BY R. VISWANATHAN
The Central Bureau of Investigation’s (CBI) reported intent to investigate the action of a retired CEO of a Public Sector Bank (PSB) for waiving processing charges of a loan has been rightly objected to by PSBs. The CEO was presumably acting within his discretionary powers. A legitimate business decision involving a modest sum has been called to question by the nation’s premier police authority, which looks into criminal cases.
Concessions in processing fees and/or interest rates on loans are extended either to make the loan proposals acceptable, or when the overall connections of the borrower justify them. Banks do extend extra facilities to a customer who brings them valuable banking business. The concessions might also be warranted to retain an existing connection in the face of stiff competition. Exercise of discretionary powers is not questioned even by the auditors, unless there is clear evidence of malafides.
One might contend that the case in question is only an investigation, which might not result in a criminal case. But the general public, including bank staff, is highly sensitive to any investigation by police authorities. The CBI should generally avoid exercising its powers in cases where business decisions result in losses to a bank. Incurring losses is a part and parcel of any business, or else, no firm would have “Profit & Loss a/c” but instead only a “Profit a/c”.
By making PSBs answerable to CBI even for legitimate actions, the Government is discouraging them from doing what the Finance Minister wants them to do, namely, adhere to the dharma of lending. Further, PSBs came under the ambit of CBI only after nationalisation of banks in 1969, and not when State Bank of India was “nationalised” in 1955. Can it be surmised that as a majority and not sole shareholder, the Government allowed SBI to function on commercial lines, keeping public interest in view?
Now that all PSBs have minority shareholders, the Government should perhaps do a rethink on its role vis-à-vis PSBs. The law allows minority shareholders to prevent a majority shareholder from running a company poorly, as is evidenced by the charge made by Children’s Investment Fund against the Government on the latter’s directive to Coal India, where both are shareholders. How would the Government like it if in the next share offering by a PSB in foreign markets, some intrepid regulator abroad were to insist on putting out the Government’s rules and procedures as one of the risk factors?
| 'Casino banking' can put us in danger: Subbarao |
| Recent financial crisis underscored the dangers of over-financialisation of the real economy ( Business Standard ) |
| Press Trust of India / Mumbai Nov 16, 2012, 20:03 IST Reserve Bank governor D Subbarao today warned against "casino banking" that has over- financialised the real economy, and called for inclusive growth to quell the growing disenchantment of the public. "A growth process that increases inequity lacks durability, and indeed even legitimacy, eventually threatening the economic and social stability. Evidence in support of this is overwhelming--the 'Occupy Movement' of the past year being just the latest manifestation of the discontent associated with inequitable growth," Subbarao said at a Seminar. s  emInaugurating two-day international conference on 'Leveraging cooperative advantage', organised by the RBI-run College of Agricultural Banking as a part of International Year of Cooperatives of the UN in Pune, Subbarao said, "The recent financial crisis has taught us some very important lessons. "The general disenchantment with 'casino banking' in certain developed economies underscored the dangers of over-financialisation of the real economy," Subbarao said. Casino banking is the practice whereby a commercial bank engages in unduly speculative or risky financial activities with the aim of achieving high profits. Stating that cooperatives have a very meaningful role to play in today's complex, globalising world, he said over the past 60 years, the world has seen several episodes of economic growth in many countries and "one clear lesson is that growth is sustainable only if it is inclusive". The inclusive growth process is the one wherein "the poor contribute to growth and the poor benefit from growth", he said. "Cooperatives can become an effective instrument for inclusive growth and a powerful platform for enfranchising the less privileged," he said. Noting that recent financial crisis saw many large commercial banks go belly-up, he said the cooperative business has been more resilient as its source of stability is the inclusiveness embedded in its very structure, which ensures that they aren't enterprises run for short-term profits, but are a business model for long-term sustainability and inclusive growth. The experience of the 2008 global credit crisis has in fact generated serious thinking about cooperatives as a bulwark for financial stability as they do only basic banking and do not indulge in investment banking or trading, thus are not dependent on bulk or wholesale markets for funding, he said. Noting that globally the cooperative movement covers over a billion people, he pointed out that India, China and the US have the largest number cooperative memberships, while Germany, France, the Netherlands and Italy lead in the number of cooperative banks. With around 6 lakh cooperatives, India has the largest cooperative movement in the world. Need to professinalise governance, functioning of co-op banks: Subbarao MUMBAI, NOV 16:
There is need to professionalise both the governance structure and the functioning of co-operative banks, according to Reserve Bank of India Governor Duvvuri Subbarao.
Pointing out that governance has to be segregated from management, Subbarao said the board must restrict its role to governance and allow the CEO and the senior management to manage the day-to-day operations of these banks.
The board can exercise oversight over the management through established channels such as reviews in board meetings and by seeking progress reports and information.
There is also a need for stringently applying the “fit and proper” criteria to personnel considered for managerial positions in these institutions, said the Governor in his inaugural address at the International Conference on ‘Leveraging Cooperative Advantage’ in Pune.
FDI in banking ---BY-----C. P. CHANDRASEKHAR
As the next session of Parliament approaches, the Prime Minister and the Congress Party seem adamant about further advancing their programme of financial liberalisation. Controversial among their favoured “reforms” is a change in the rules governing foreign investment in India’s banking sector. Opposition to this move was one of the issues motivating a two-day strike by around a million bank employees in August this year.
But those advocating liberalisation of governance regulations in the form of equity caps for foreign shareholders and caps on voting rights for both domestic and foreign investors are unwilling to listen. They often even suggest that this is an area in which reform has been almost absent or creeping, and is restricting the ability of private banks to mobilise foreign capital to enhance their capital base. But are they right?
The fact of the matter is that governance rules in the banking system have indeed been changed to accommodate the private investor (domestic and foreign) after liberalisation. Besides permitting the entry and consolidation of new private banks, the government (through the Ministry of Commerce) had as far back as March 5, 2004, announced a set of decisions with reference to foreign investment in the banking sector, which relaxed the cap on foreign equity in Indian banks to 20 per cent in the case of public sector banks and 74 per cent in the case of private banks. This was in addition to the permission granted to foreign banks to operate in the country through wholly owned subsidiaries subject to increasingly relaxed rules.
Consequent to the Ministry of Commerce announcement, the Reserve Bank of India issued a more detailed and comprehensive set of policy guidelines on ownership of private banks. Recognising that the 5th March 2004 notification by the Union Government had hiked foreign investment limits in private banking to 74 per cent, the guidelines first clarified that this ceiling was applicable to the sum total of foreign investment in private banks from all sources (FDI, Foreign Institutional Investors, Non-Resident Indians).
More importantly, in the interests of diversified ownership the guidelines had declared that no single foreign entity or group could hold more than 10 per cent of equity. There was also a 10 per cent limit set for individual FIIs and an aggregate of 24 per cent for all FIIs, with a provision that this can be raised to 49 per cent with the approval of the Board or General Body. Finally, the 2004 guidelines set a limit of 5 per cent for individual NRI portfolio investors with an aggregate cap for NRIs of 10 per cent, which can be raised to 24 per cent with Board approval.
Finally, in keeping with this more cautious policy, the RBI decided to retain the stipulation under the Banking Regulation Act, Section 12 (2), that in the case of private banks the maximum voting rights per shareholder will be 10 per cent of the total voting rights (1 per cent for public banks). The 10 per cent ceiling on equity ownership by a single foreign entity was partly geared to aligning ownership guidelines with the rule on voting rights.
The response to this from liberalisation advocates was that the whole exercise was pointless inasmuch as the ceiling on single investor ownership and voting rights would deter foreign investors. The evidence shows that this expectation has turned out to be completely false. As Chart 1 shows, the share of foreign investors in private bank equity exceeds 50 per cent in five banks and stands at between a third and a half in another eight. Moreover, Chart 2 shows that in a number of instances the share of foreign equity has increased between 2005 (when the guidelines had come into force) and 2012.
Problems arose only in the case of those entities in which single foreign entities held more than 10 per cent equity. This was, for example, true of the Development Credit Bank (which had the Aga Khan Fund for Economic Development as lead shareholder with around 25 per cent of equity) and the Catholic Syrian Bank (in which Surachan Chawla of the Siam Vidhya group from Thailand had acquired 36 per cent shares in the 1990s and has since been able to reduce the total to only 21 per cent). The problem faced by these entities is that of finding buyers willing to acquire small blocks of equity to ensure adequate dilution of lead stakeholder ownership in a bank being run by a dominant foreign shareholder. As a result they have been under pressure for not complying with the RBI’s demand to dilute equity and faced with threats of penal action.
The implication of this is clear. The problem with well-performing private banks is not that it is difficult to attract foreign equity investment. The problem is that current rules do not allow entry of those whose intent is to exercise control over a local bank with an adequate share holding and equivalent voting rights. Hence, if the need is to allow foreign equity infusion to meet prudential requirements such as the Basel norms that is still possible. What is not allowed is the entry of single foreign investors seeking to establish or acquire domestic private banks with a controlling stake and voting rights.
The case for such regulation of foreign presence had been clearly specified in the past. The RBI has for long strongly advocated diversified ownership of banks. The RBI’s Report on Trend and Progress of Banking in India, 2003-04 states: “Concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses. Corporate governance in banks has therefore, become a major issue. Diversified ownership becomes a necessary postulate so as to provide balancing stakes.”
A more elaborate exposition of the RBI’s views on the matter came from Rakesh Mohan, a former Deputy Governor of the RBI. In a speech made at a Conference on Ownership and Governance in Private Sector Banking organised by the CII at Mumbai on 9th September 2004 he remarked:
The banking system is something that is central to a nation’s economy; and that applies whether the banks are locally-or foreign-owned. The owners or shareholders of the banks have only a minor stake and considering the leveraging capacity of banks (more than ten to one) it puts them in control of very large volume of public funds of which their own stake is miniscule. In a sense, therefore, they act as trustees and as such must be fit and proper for the deployment of funds entrusted to them. The sustained stable and continuing operations depend on the public confidence in individual banks and the banking system. The speed with which a bank under a run can collapse is incomparable with any other organisation. For a developing economy like ours there is also much less tolerance for downside risk among depositors many of whom place their life savings in the banks…Hence diversification of ownership is desirable as also ensuring fit and proper status of such owners and directors.
It is evident that the RBI, which is the regulator of the banking sector, had a strong case for issuing elaborate guidelines on bank ownership to ensure diversification. Those reasons retain their relevance even today. So there is no case for altering them, especially if the evidence suggests that accessing foreign equity, if needed, to enhance the capital of banks is possible within the current regulatory framework.
http://www.thehindu.com/business/Economy/fdi-in-banking/article4101872.ece
Criminal probe of routine bank dealings toxic for businessEconomic Times
The government will do well to heed public sector banks' (PSBs) warning that if the Central Bureau of Investigation (CBI) starts questioning bona fide commercial decisions, their lending decisions will be impaired.
http://economictimes.indiatimes.com/opinion/editorial/criminal-probe-of-routine-bank-dealings-toxic-for-business/articleshow/17248079.cms |
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