<p><em>RBI circular on non-promoter directors in `defaulter’ firms to be challenged, writes <strong>Raghu Mohan</strong></em></p><p>Executive directors (ED), managing directors and chairmen at state-run banks may well find life turning difficult. A raft of enquiries made by the Central Bureau of Investigation (CBI) into dodgy credit decisions at these banks have emboldened unions who are set to move court to bring the top personnel at these banks under “codified service rules". On the anvil is also a legal challenge to Reserve Bank of India (RBI) on its decision to exclude non-promoter directors from the list of wilful defaulters “except in the rarest of the rare” cases.</p><div> </div><div>As of now, unlike bank staffers up to the level of chief general managers who come under departmental rules, the top three in a state-run bank face no such scrutiny. It is partially explained by the fact that when someone is posted to the level of ED and above, he or she becomes an employee of the Government of India; until then, you are an employee of the bank you work for.<div> </div><div>“You may be enquired for acts of omission or commission under the IPC, by the Central Bureau of Investigation (even after retirement), but from within the bank, there are no checks and balances once you are posted as ED or higher”, explains Vishwas Utagi, general secretary-All India Bank Employees Federation (AIBEA).</div><div> </div><div>The issue has now come under sharp relief because of the feeling that junior officers at state-run banks are being harassed for acts done by their seniors who may have since moved up to ED and higher positions at other such banks (and who may have since retired). That junior officers (CGMs and below) and the bank are now left holding the can.</div><div> </div><table align="right" border="1" cellpadding="2" cellspacing="2" style="width: 300px"><tbody><tr><td style="text-align: center;"><span style="color:#0000cd;"><strong>Do You Believe This?</strong></span></td></tr><tr><td><div><strong>The P J Nayak Report Committee to Review Governance of Boards of Banks in India (13th May 2014) refers to a working paper: `Are the Monitors Over-Monitored? Evidence from Corruption, Vigilance, and Lending in Indian Banks' (A. Banerjee, S. Cole and E. Duflo, per, Harvard Business School; 2007). It argues lending decisions of loan officers of state-run banks are impacted by fear of prosecution for corruption. The analysis is based on a standard event methodology to assess the impact of actions taken by the Central Vigilance Commission (CVC) on lending. It encompasses all commercial banks in India and covers the period between 1981 and 2003. What are the conclusions?</strong></div><div> </div><div><strong>Overall lending reduces dramatically in the branches that face CVC action; there is also a contagion effect as lending in branches located in close proximity to the affected branch also goes down; unlike many other transitory 'shocks', the impact of CVC action on lending is persistent; it takes slightly more than two years from the time of CVC action for lending to recover; and the impact of the consequent loan officer conservatism is predominantly felt by small borrowers, who are traditionally considered</strong> <strong>by banks as opaque and risky.</strong><br><br><a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=784#CH5"><strong>For details click here</strong></a></div></td></tr></tbody></table></div><div><strong>Whose Line Is It Anyway?</strong></div><div> </div><div>A vast majority of the non-performing assets (NPAs) in the system and those referred to the Corporate Debt Restructuring Cell (CDR) did not become what they became overnight, but have festered around.</div><div> </div><div>Take the case of Kingfisher Airlines’ Rs 7,000-crore plus debt (it varies on who you seek out to know the truth!) -- the writing on the wall has been around for four years now, but till date save for United Bank of India (United Bank), not a single bank has moved to nail it as a wilful defaulter. Now it’s a different matter that the Calcutta High Court had observed that United Bank’s empowered committee which decides on who is a “wilful defaulter” had four members instead of three as per RBI norms. But that should not have stopped United Bank (they could have reconstituted the said Committee) or other banks’ (whose Committees were in compliance with Mint Road’s norms) from pressing ahead with their legal options.</div><div> </div><div>We now get to the legal challenge from the unions on RBI’s decision to exclude directors from the list of wilful defaulters.</div><div> </div><div>The directive (of 1st July 2014 and updated up to 7th January 2015) which came as an amendment to the central bank's master circular on wilful defaulters had said: “In view of the limited role of non-promoter and non-whole time directors (nominee and independent directors) in the management of a company's debt contracts, their names shall now be excluded from the list of wilful defaulters, except in the rarest circumstances which also have been specified in the master circular”.</div><div> </div><div>Mint Road had pointed to Section 2(60) of the Companies Act (2013) which defines an officer who is in default to mean only the following categories of directors:<br> </div><div>· Whole-time director</div><div>· Where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;</div><div>· Every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance.</div><div> </div><div> </div><div>“Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that (i) he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the Minutes of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes, or (ii) the wilful default had taken place with his consent or connivance”.</div><div> </div><div>The unions’ contend that given the state of the dud-loan problem, all concerned on the board must be put under scrutiny, “more so as some wax eloquent on corporate governance”.</div><div> </div><div>The quality of deliberations at state-run banks is an eye-opener. The P J Nayak Committee to Review Governance of Boards of Banks in India (13th May 2014) noted a detailed scrutiny of board notes suggests that state-run banks’ boards focus inadequately on discussing long-term strategy.</div><div> </div><div>“The focus is more tactical and less strategic, such as the location of branches and ATMs. Moreover, the deliberations are driven from the vantage-point of compliance rather than business economics. There is generally weak evidence of the monitoring of measurable disaggregated business goals in relation to targets”</div><div> </div><div>In one bank, the taxi-fare reimbursement policy got the same coverage as its NPA recovery policy! Other non-strategic issues discussed include purchase of office premises at Bhopal and provision of leased residential accommodation to officers in six locations (their inclusion in board deliberation - absent in private sector banks - probably reflecting vigilance enforcement concerns). Other non-strategic issues discussed include the details of a lecture by a bank's boss at a college; and extensive coverage of the Finance Minister's visit to the bank!</div><div> </div><div>And given the pile of dud-loans, there should be extensive coverage of the Finance Minister's visit to these banks!!</div><div> </div><div> </div>
BW Reporters
Raghu Mohan is an award-winning senior journalist with 22 years of experience. He has worked for BW Businessworld since December 2006, and is currently its Deputy Editor. His area of expertise is banking – commercial, investment, and the regulatory. Previous stints include those at The Financial Express and Business India.
