Banking controversies & water cooler chats

As with every formal ecosystem, there have always been two opposing narratives around the Indian financing ecosystem. 

The first is the official, sanitized version, visible in formal settings. This is pro-establishment, shows deference to those in authority, is upbeat, and offers lots of photo-ops alongside a few suppressed yawns. 

The alternative narrative, in contrast, is whispered, informal and gossipy. These are the uncensored, wild, chats around the water cooler that sneer at the official narrative. 

A healthy ecosystem will pull up the alternative narrative towards the official one. Sadly, as multiple banking scandals now come to light, gossip has clearly taken center stage, and the official narrative is Absent Without Official Leave. 

For those in authority wanting to make a difference, sifting through the gossip can be very useful. It can surface misconceptions that need to be corrected, and highlight blind spots. While the current focus is inevitably on individual allegations, here are four generic gossip themes that perhaps warrant some introspection.

The role & regulation of middlemen in finance

From individual CAs to consultants and brokerage houses, there are middlemen involved in many financing transactions. The insinuation is that some of them facilitate malpractice, helping the beneficiary pay off the benefactor. 

On a look forward basis, there is merit in reviewing whether such middlemen are at all required, and if so, should they be formally registered as such, and subject to regulatory oversight. Financial institutions should then be asked to record which entities are involved in each financing transaction. It should be in everybody’s interest that the chatter around this topic subsides.

The need for markets and benchmarks

The most common gossip is around dubious lending transactions, hinting at unnaturally easy terms, and/ or overlooking of credit weaknesses. This chatter usually comes with the advantage of hindsight, after the loan has turned sour. The insinuation of quid pro quo then follows.

Let’s look ahead - how can someone on the board or governance chain of a financial institution ensure a fresh loan is rightly priced and structured? How can anyone reassure stakeholders that a loan that turns sour was made in perfectly good faith?

Given the opacity around and bespoke nature of financing transactions today, establishing reasonableness of structure and pricing can be difficult. We will eventually need traded credit markets – bonds, loans, and swaps – so that fair prices can be established and verified at the time of dealing. While there is half a corporate bond market, loan and credit spread markets are non-existent. 

Frustratingly, markets will not develop overnight, but a start has to be made.

Establishing a common code of conduct for financial relationships

Consider the following situations, which have all fueled water cooler chats. Is it proper for a lender and a client to go on family holidays together? Is it okay for one to arrange petty gifts and entertainment (IPL tickets, anyone?) for the other? Is it okay for one to arrange for an internship or employment for friends and family of the other? Is it okay for them, or their family members, to invest jointly in a separate business venture? I have heard different answers to these questions from different senior bankers.

There is a need to look ahead and develop a common, uniform code of conduct that every financial institution and their personnel sign up to, and are held accountable for. 

The whispers from the other side 

This is not a great time to warn against the pendulum swinging too much to the other side. Yet, the point has to be made.

As we emerge from this crisis, we will strengthen the system, so that Type I errors – of someone saying yes when they should have said no – will hopefully reduce. Over-reaction will increase expensive Type II errors – when officials will start to say no, when they should be saying yes. 

Many bright young bankers today do not wish to be a part of any credit approval committee. Imagine yourself in such a committee of a public sector bank. After many years and several approvals, two large loans turn sour. Imagine that this comes up during an election year, amidst public outrage and media glare. Are you confident of a swift, informed, objective and fair review?

The water cooler chat amongst bankers is that by and large, the process followed by the many investigative agencies leaves much to be desired. First, despite specialized economic wings being set up, some investigating officers still seem unaware of the financial ecosystem. As one wag put it, the situation is analogous to asking a career banker to investigate a murder. Second, mysterious selective leaks ensure the public senses progress, while the banker’s reputation is severely tainted. Third, the investigation then drags on for years, and the career, personal finances and sanity of the concerned staff are at risk throughout. 

The system has to reassure the honest that as long as their conscience is clear, they have nothing to fear. There is a need for one strong, specialized investigative agency that has the expertise and resources to do a credible, time-bound investigation into financial crime. Without such a trusted agency, we risk freezing the ecosystem to a grinding halt – something we can ill-afford.