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Banking Reform in India∗ - page 28 / 57

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may be very difficult to provide effective incentives.32 If this were the case, loan officers would prefer not to take new decisions. Simply renewing the loan without changing the amount is one easy way to avoid responsibility, especially if the original decision was someone else’s (loan officers are frequently transferred). And when they do take a decision, making sure that they did not deviate enormously from the precedent, is a way of covering themselves against charges of wrong-doing or worse.

Not surprisingly, the Central Vigilance Commission disputes the claim that there is a “fear psychosis,” and, to bolster their position, released in 2000 a “critical analysis” of vigilance activity in public sector banks in 1999. The analysis reveals that in 1999, the Central Vigilance Commission received 1916 references, 72 percent of which were credit-related, recommending punishment in the majority of cases. Their 2000 report states “out of every 100 cases coming before it, the Commission would advice major penalty proceedings in 28 cases, minor penalty proceedings in 32 cases, and administrative warning/exoneration in 40 cases.” (p. 9). The author of the report, a CVC official, argued that this level of activity should not be enough to cause “fear psychoses”: “These figures reveal that a person is not damned the moment his case is referred to the Commission... These statistics appear to indicate a very fair and objective approach on the part of the Commission to the cases that were referred to it.33

The rest of this sub-section, based on work by Cole looks at whether there is any evidence for the so-called fear psychosis.34 The basic idea is simple: we ask whether bankers who are “close to” bankers who have been subject to CVC action, slow down lending in the aftermath of that particular CVC action.

[TABLE 8 ABOUT HERE] Data: Monthly credit data, by bank, were provided by the RBI. Data on frauds are naturally very difficult to come by. It is also the policy of the government of India to keep the data on vigilance activity confidential: while some aggregated statistics are published, they are too aggregated to be useful for econometric analysis. However, in 1998, in an effort increase the penalty for fraud through stigma, the government authorized the CVC to publish the name, position, employing bank, and punishment of individual officers of government agencies charged

32 Dixit (1996) describes how the presence of multiple principles in bureacracies may lead to inaction. 33 Government of India (2000), p.10. 34 Cole (2002).

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