Need a reality check

The arrest of the topmost official of LIC Housing Finance and senior managers of some public sector banks for irregularities in loan disbursement is a continuing sign of poor oversight and supervision of banking operations. The amounts involved are big and that should have been a special reason for better supervision. Other parties involved in the scandal are real estate firms, which do not have the best reputation for financial uprightness, and an intermediary, which facilitated the wrongful disbursal of loans. Banks in the country are fairly well regulated and that was why they were not affected by the recent global financial turmoil. The irregularities unearthed by the CBI may not point to a systemic  problem in the country’s banking world. They rather underline the scope for individual corruption of high magnitude among officials. Since no systemic failure was involved, the panic reaction to arrests and disclosures, as seen in the stock market crash, was perhaps overdone. There were even doubts whether the disclosures were intended to create a diversionary sensation.

But it is worrying that such corruption has got so well organised and involved a number of banks at the same time, and even the CEO of the highest-ranked housing finance institution. The Reserve Bank has often advised banks to be cautious in extending loans to real estate companies, as too much easy money in the sector can create asset bubbles. But it seems the advice was ignored in the cases that have come to light. There may be others too. The irregularities could have been detected early if the internal auditing systems were more efficient. The CBI started its investigations about an year ago. It has found irregularities so far only in some project loans. If they go beyond bribery and more extensive violations of rules and regulations are brought to light, more serious remedial measures will need to be considered.

It is necessary to bring more transparency into the working and finances of the real estate sector. This is difficult because the sector is patronised by politicians. If the present trend continues, it can endanger the financial system. Simplification of rules and procedures and strict and continuous monitoring of credit movement and utilisation can reduce the scope for irregularities. The finance minister has asked all banks and financial institutions to make an independent evaluation of their assets and credit documentation. This should be done as a reality check.