Bankers need help to take on risk

Bankers need help to take on risk

Last week, RBI governor Shaktikanta Das chided banks for being risk-averse to the point of abdicating their basic task of lending. This is all to the good. Their systems should be capable of smelling the risk associated with a loan proposal, he said. Certainly, the banks should do their bit to kick-start lending, but other parts of the system, including RBI, should do their bit as well.

At present, there are some structural force multipliers in place, as far as risk is concerned. One, banks are expected to fund long-gestation projects, whose ability to service the debt will kick in after the deposits the banks use to extend the loan have matured. A functional debt market should take care of funding long-gestation projects. Two, bankers have little positive incentive to take risk. The structure of their remuneration is such that whether they take risk and do good for the bank or they play it safe and lend little, they earn pretty much the same. At the same time, if any loan turns sour, there is the likelihood of criminal investigations blighting their reputations and post-retirement lives. Three, public sector bankers are not free agents who can perform banking purely on the strength of their commercial calculus. They have to follow the government’s directives — to provide easy loans in rural areas, for example. And the culture of subtle hints from the netababu network about lending decisions is difficult to stamp out, so long as government ownership continues and is exercised through government nominees on bank boards. If a holding company for public sector banks is created and its board charged with appointing and supervising the boards of individual banks, this nexus could be broken.

There are larger, systemic hurdles to be overcome as well. If businesses could operate without having to grease palms altogether, the temptation to inflate project costs and sequester a portion of the padding to make informal payoffs would come down. Transparent political funding would remove the compulsion on industry to build war chests, with funds diverted from loans.