Why central vigilance commission shouldn't be part of a NPA resolution forum

It is a time-honored tenet of the auditing world that an auditor should not partake directly or indirectly in designing a system. The reason is not far to seek. If he does, he would be compromising his position tremendously. For, in that case he would be put in an embarrassing and awkward position of having to audit the very system he has had role in designing.

It is for the same reason the code of conduct for auditors proscribes the statutory auditor of a company from doubling in as its internal auditor as well - as statutory auditor he has to comment upon the adequacy and effectiveness of the internal audit system put in place by the management. The role of internal auditor would conflict with his role as the statutory auditor though in actual practice, auditing firms get round this moral hazard and code of conduct by getting a proxy auditing firm appointed as internal auditor.

It is against this backdrop that the central government’s proposal to set up a NPA resolution forum comprising among others the RBI and the Central Vigilance Commission (CVC) has raised eyebrows and hackles. The implicit rationale underpinning CVC’s induction is its overweening presence would deter and nip in the bud quid-pro- quo deals (mutual backscratching deals to put in more bluntly) between the officialdom and the wily borrower. But what must be nipped in the bud is this hare-brained proposal.

First, any adjustment with an incipient and potential defaulter would involve a small or big sacrifice on the part of the bank. By being a party to such a compromise as a forum member, the CVC would find it difficult to proceed against the banker or any official later on because he would turn around and smugly point out that it was consummated with CVC’s blessings. Surely, CVC as indeed any investigative agency should be spared the blushes.

It must also be remembered that a committee or forum is by definition perceived as antidote to deals on the sly by individuals. That is why it is said larger the committee the better unless of course all of them fall a prey to blandishments which is unlikely. The point is the forum itself can be counted upon to behave with rectitude without the hawkish presence of the CVC.

Second, banking is not CVC’s forte. It lacks domain knowledge and expertise which RBI has in abundant measure. On the contrary, it would smell rat in any compromise or restructuring. It may not be able to tell between defaults engendered by genuine economic reasons experienced by the borrower and wilful ones.

Thirdly and lastly, the move flies in the face of the recently crafted comprehensive bankruptcy code which sets store by the principle of early resolution of NPA problem without allowing it to fester or take roots. The National Company Law Tribunal (tribunal) that would resolve corporate bankruptcy quickly and comprehensively by addressing the concerns of other stakeholders as well like employees and government should not be snapped at its heels much less exposed to the threat of even being unwittingly marginalised or undermined by a parallel forum.

Parenthetically, it may be mentioned that financially advanced economies have found a way out of the niggling problem of NPAs by simply asking the corporates to seek funds from the bonds market which has its own disciplining mechanism - the threat of being awarded the junk bond status with its grim implications for cost of borrowing. The argument is banks should lend only to small and medium enterprises (SMEs) which cannot access the bond market and which give lesser shocks than a big ticket borrower. But that is another story for another time.