Indian Banks and The Prevention of Corruption Act : Freedom and Discipline

Summary

This Forum of Free Enterprise booklet reproduces Dr. Ashima Goyal’s lecture at the Fourteenth M. R. Pai Memorial Award Function (Mumbai, 10 September 2018), preceded by an editorial introduction by Sunil S. Bhandare. Goyal — Professor at IGIDR and a member of the Prime Minister’s Economic Advisory Council — uses the occasion to ask how Indian banks can be properly disciplined without being criminalised, and reads the 2018 amendment to the Prevention of Corruption Act against that test.

The heart of her argument is institutional hysteresis. Independent India layered centralised planning onto a federal constitutional structure, multiplying agencies without clean exits, so ‘controls created discretion and corruption.’ Anti-corruption institutions like CBI and CVC were themselves built for that control regime and never absorbed the post-reform distinction between commercial risk-taking and crime. Once reforms raised the value of natural resources, suspicion and CAG loss estimates pushed politicians and industrialists into jail, growth and credit collapsed, and a tenth-year acquittal could not restore reputations or assets.

Goyal then walks through the NPA story in public sector banks. PSBs took on long-gestation infrastructure lending after development banks closed and bond markets failed to deepen; when private projects soured and global and domestic shocks compounded firms’ losses, rollovers were branded ‘evergreening’ and FIRs were issued against bankers and even independent directors who had followed due process. Drawing on her own work on credit, market and country risk, she insists that banks are natural risk-aggregators and that reform should make them bear more risk through equity rather than treat ordinary losses as criminal — vigilance institutions, in an age of big data, can rely on patterns and random checks instead of accusatory lists.

The rendered pages close with her assessment of the Prevention of Corruption (Amendment) Act, 26 July 2018. She welcomes statutory deadlines on trials (two years, extendable to four), reads Section 8’s stiff penalties on bribe-givers as a deterrent to corporate cornering of resources, and notes the escape clauses for compelled or cooperating bribe-givers. The chunk ends mid-discussion of the ‘intentional enrichment’ and ‘undue advantage’ clauses; the remaining pages of the booklet (printed pages 19 onward) are not in this rendered set.

Key points

• Goyal’s lecture, delivered at the 14th M. R. Pai Memorial Award Function (Mumbai, 10 Sept 2018) and published by the Forum of Free Enterprise, asks how Indian banking can be disciplined without being criminalised.

• Institutional ‘hysteresis’: superimposing central planning on a federal constitution produced a multiplicity of overlapping agencies with no accountability, so ‘controls created discretion and corruption.’

• CBI, CVC and the 1988 PCA were built for a control regime and could not distinguish post-reform commercial risk-taking from criminal misconduct; the CAG’s headline loss estimates in the 2G case fed an atmosphere of suspicion that paralysed decisions.

• PSBs took infrastructure loans to compensate for shuttered development banks and thin bond markets; global slowdown plus ‘permission paralysis’ turned many loans non-performing, and regulatory over-reaction punished honest bankers along with crooks like Nirav Modi.

• Banks face credit, market and country risk; reform should let them bear more risk through equity rather than treat ordinary loss as crime, with insurance-vs-incentive trade-offs left to ex-ante diversification.

• Vigilance institutions can be made market-compatible by relying on big-data patterns, suspicious-transaction reports and random checks rather than reputation-damaging accusatory lists.

• The 2018 PCA amendment imposes hard deadlines (two years, extendable to four) on prolonged investigations and stiffens punishment of bribe-givers (up to seven years), with escape clauses for compelled bribers and compliance-defended corporates.

• Goyal frames the whole project as a continuation of the Forum of Free Enterprise’s fight — freedom from stifling controls must now be paired with the right kind of discipline.