The arrest of a chairman-cum-managing director of a public sector bank in connection with an industrial loan was shocking, to say the least. As if it was not sufficient, the Central Bureau of Investigation is now probing the circumstances in which another such bank gave a huge loan to a private airline. In both cases the banks concerned have suffered enormous losses. If anything, the two incidents are a pointer to cronyism and malfeasance tainting the lending practices of public sector banks. The bad loans these banks have advanced over the years would run into thousands of crores of rupees which they would have to ultimately write off. It represents a Himalayan failure on the part of the banks.
All this is a pointer to the process of credit appraisal and supervision, which are either fundamentally wrong or are not done according to the rule book. In order to put an end to such loss-causing practices, all the banks must be asked to undertake an immediate risk assessment to identify cases in which decisions were made contrary to internal assessment. Such an exercise will indicate how widespread the problem is. It is noteworthy that in the case of the arrested chairman, he had allegedly taken an extra interest to advance the loan in the full knowledge that it entailed a heavy risk to the bank.
The manner in which appointments to the bank boards is made also calls for a relook. Newspapers had reported recently how a father was replaced by his daughter as a board member in a public sector bank. It is not uncommon to find the government nominating its cronies to such posts with the least consideration for banking practices. All such directors should be replaced by professionals who have long-term interest in the health of the banks. There is also need for strengthening the supervision process by appointing and using qualified accountants and making much more use of real-time data. It is pointless to wait for the situation to deteriorate and then hand over the cases to the CBI. A stitch in time saves nine.