One cannot take out banker's discretion while lending: RBI Governor

Syndicate Bank bribery case: RBI Governor Raghuram Rajan (in picture) cautions against 

extrapolating the issue to the entire public sector banking system.

 

BL 5 Aug 2014

The Reserve Bank of India Governor, Raghuram Rajan, said that one cannot take out banker’s discretion while lending, in reference to the recent Syndicate Bank issue where the Chariman of the bank has been arrested for allegedly asking for money to raise the loan limit for a few corporates.

Rajan also cautioned against extrapolating the issue to the entire public sector banking system.

“I would emphasise that one should not extrapolate from this for the entire public sector banking system and assume that the entire problem in the public sector banking system is because of criminality rather than because of other factors,” he added.

Pricing of loans

When asked if the RBI should come out with recommendations on pricing of loans to curb quid-pro-quo in lending, Rajan said that this would be tantamount to taking the banker out of the equation.

“The whole point of banking is taking risks and using discretion in taking those risks… When there is banker’s judgment, you have to be careful about what genuine banker judgment is and what non-genuine banker judgment is,” he added.

He added that the answer is not to make all loans uniform based on some observable characteristics because then you might make very very bad decisions because you are not using your intuition on the character of the borrower.

“So, we have to live with this. This episode that is alleged to have happened points to the fact that we have to look again at the governance of the public sector banks and understand the deficiencies there and try and improve it,” Rajan said.

(This article was published on August 5, 2014)