Risks of three Cs: CVC curtailing CBI’s scope for bank probes is excellent. But PSBs still face perverse incentives

News: The Central Vigilance Commission has amended rules to minimise the possibility of CBI taking unilateral decisions on investigations into alleged bank frauds. Also, bankers have asked GoI to have a “sunset” period for investigations, subject to conditions.

What approach should Government adopt?

It should revisit its entire incentive structure that influences credit disbursal in public sector banks (PSBs). In the Union Budget 2021, the finance minister said the financial sector is one of four strategic sectors and public sector entities will continue to function in the financial sector.

If the government wishes to run commercial enterprises, it should keep two considerations in mind

First, That any commercial enterprise has to take risks. So, the banking sector should not be hamstrung by the regulatory burden of 3C’s CBI, CVC and CAG.

Second, Indian investigative agencies try to guess the motives behind the decisions taken by the banks. The culture of distrust has impacted the financial sector and economy. This has made PSBs risk-averse. This approach should be done away.

Read here: Centre may continue to hold at least 26% stake in public sector banks
What should be the way forward?

The ideal solution is that the government should exit the financial sector and stick to policymaking.

In the present situation, where PSB continues, there is a need to change the incentives for bankers. Also, CBI should develop greater domain expertise in financial matters to lower risks to India’s economy.

Read here: Public sector banks and corporate governance

Source: This post is based on the article “Risks of three Cs: CVC curtailing CBI’s scope for bank probes is excellent. But PSBs still face perverse incentives” published in The Times of India on 11th January 2022.

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