Times of India has attributed slowdowns in lending directly to vigilance activity.30 A working group on banking policy set up by the Reserve Bank of India, and chaired by M.S. Verma, noted:
The [working group] observed that it has received representations from the manage- ments and the unions of the banks complaining about the diffidence in taking credit decisions with which the banks are beset at present. This is due to investigations by outside agencies on the accountability of staff in respect of some of the N[on] P[erforming] A[ssets]. The group also noticed a marked reluctance at various level to take any credit decision.31”
In response to criticism from bankers, economists, and others, the Central Vigilance Com- mission (henceforth CVC), which is the body entrusted to investigate potential cases of fraud in the public sector, introduced in 1999 a special chapter of the vigilance manual, on vigilance in public sector banks. While this new chapter was meant to reassure bankers, the language would probably not reassure anyone with experience working in a western bank. The manual reads, for example, that “every loss caused to the organization, either in pecuniary or non-pecuniary terms, need not necessarily become the subject matter of a vigilance inquiry. . . once a vigilance angle is evident, it becomes necessary to determine through an impartial investigation as to what went wrong and who is accountable for the same.” (p. 5)
Interviews with public sector bankers revealed widespread concern: the legal proceedings surrounding charges of corruption can drag on for years, leaving individuals charged with cor- ruption in an uncertain state. Even if an individual is exonerated, she may have been relieved of her duties, transferred, or passed over for promotion during the time of investigation. In theory (as well as practice), even one loan gone bad may be sufficient to start vigilance proceedings. The possible penalties stand in stark contrast to rewards. While banks are constantly urged by the Reserve Bank of India to lend as much as possible, there are no explicit incentives for making good loans, or ways to penalize officers who make conservative decisions. In effect, bankers are accountable to more than one authority –the loan officer’s boss is one of them but central vigilance may be another, and the press may be yet another. In such circumstances, it
30 “CVC Issues New Norms to Check Bank Frauds,” Hindustan Times (1998), among others. 31 Quoted in Tannan (2001), p. 1579.