K C Chakrabarty: Vigilance administration - encouraging probity in
public life
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at a
seminar organised by the Centre For Integrity, Governance and Training on "Vigilance
Administration", Mumbai, 11 November 2013.
* * *
Assistance provided by Smt. N. Mohana and Shri R. K. Sharma is gratefully acknowledged.
1. Shri A. K. Handa, Chairman, Centre For Integrity, Governance & Training on Vigilance
Administration (CIGVA); Shri S .K. Goel, former CMD, UCO Bank; Shri R.V. Verma,
Chairman, NHB; other officials of CIGVA; delegates to this seminar on Vigilance
Administration, ladies and gentlemen! At the outset, let me congratulate CIGVA and Shri
Handa for creating an institutional forum which seeks to strengthen the governance
processes with an underlying objective of bringing about qualitative improvements in public
service delivery for overall societal benefits. It is, indeed, commendable that CIGVA has
been organising these training programmes for generating fresh capacities and for raising
the competency levels of personnel involved in vigilance administration so that the standards
of ethical conduct are effectively met in all public institutions. The exchange of ideas and
anecdotes that happen in such seminars increase our knowledge exponentially and make us
aware of issues afflicting the system as a whole.
Introduction
2. The importance of vigilance in our daily life is aptly established in the quote of John Philpot
Curran, an Irish orator, politician, lawyer and judge who stated that "The condition upon
which God hath given liberty to man is eternal vigilance". Pearl S. Buck, an American writer
and novelist had further reinforced the importance of vigilance in our daily life by stating that
"When good people in any country cease their vigilance and struggle, then evil men prevail".
These observations made years back hold true even today, where one has to be ever vigilant
to ensure that no harm befalls him, his family or the society at large. Hence, the need for
awareness about vigilance and the various dimensions to it has become all the more critical
in the modern public space.
3. The dictionary defines Vigilance as being watchful and wary to detect danger; being ever
awake and alert. While being vigilant is important in all walks of life, the observance of
vigilance becomes more critical in the financial sector and particularly for institutions like
banks, which deal with public money. While in my address today, I would draw specific
references to the banking sector, the fundamental issues that I intend to raise are pretty
much sector neutral as far as the Government and public sector undertakings are concerned.
However, though, the vigilance issue is relevant in the private sector as well, the issue does
not assume such a big proportion ostensibly on account of expeditious and summary nature
of punishments meted out to the guilty.
4. Banks, which act as an intermediary between depositors and lenders, are duty bound to
observe the highest standards of safeguards to ensure that money accepted from depositors
are not mis-utilised and are put to gainful use or are available with them to be paid on
demand. In order to ensure this, banks are not only required to do due diligence on the
borrowers but are also expected to put in place appropriate safeguards to ensure that the
transactions being undertaken by the staff are as per laid down guidelines. The watchfulness
enforced by the vigilance function is required to ensure that public money, which banks hold
in fiduciary capacity is not allowed to be misused by the delinquent elements in any manner.
Precisely, the same logic holds good for the need for a vigilance function in other public
sector enterprises or in the Government as these institutions too are custodians of public
funds. In a sense, an effective vigilance is a sine qua non for good Governance.
Vigilance function in banks
5. The need to have a dedicated body to look into vigilance and anti-corruption issues in
public sector undertakings was felt way back in the early 1960s when Government of India
set up the Committee on Prevention of Corruption [popularly known as Santhanam
Committee] on whose recommendation the Central Vigilance Commission (CVC) was set up
in February 1964 as an Apex Body with its vigilance units headed by Chief Vigilance Officers.
The Commission was since accorded statutory status on August 25, 1998 through the
Central Vigilance Commission Ordinance, 1998 which was substituted by Central Vigilance
Commission Act, 2003.
6. Public Sector banks fall under the jurisdiction of Central Vigilance Commission on account
of their incorporation and operation as public sector entities. Further, RBI also issued
guidelines in May 2011 advising all the private sector banks to evolve suitable structure
within their organization which would scrutinize all cases where any foul play is suspected
from vigilance angle. This mechanism is intended to ensure that reckless decisions resulting
in loss - of money and reputation - to the bank - are identified and suitable action is initiated
against the delinquent employees promptly and effectively. The existence of a credible and
responsive vigilance system acts as an effective deterrent to disorderly conduct.
7. The guidelines on vigilance administration are issued by the Central Vigilance
Commission. The Chief Vigilance Officers in the respective organisations have been
authorised to decide upon the existence of a vigilance angle in individual cases, at the time
of registration of the complaint. Once a complaint has been registered as a vigilance case, it
will have to be treated as such till its closure, irrespective of the outcome of the investigation.
Although formulation of a precise definition is almost impossible, generally a vigilance angle
could be perceptible in cases characterised by:
•
commission of criminal offences like demand and acceptance of illegal gratification,
possession of disproportionate assets, forgery, cheating, abuse of official position
with a view to obtaining pecuniary benefits advantage for self or for any other
person;
•
irregularities reflecting adversely on the integrity of the public servant;
•
lapses involving gross or wilful negligence, recklessness, failure to report to
competent authorities, exercise of discretion without or in excess of
powers/jurisdiction, cause of undue loss or a concomitant gain to an individual or a
set of individuals/a party or parties and flagrant violation of systems and procedures.
I would like to add here that not only the financial propriety of transactions but at times,
certain non-financial aspects also need to be examined from a vigilance angle. I will return to
this issue in a little while.
8. As in all organisations, vigilance activity in financial institutions is an integral part of the
managerial function. The vigilance function should not be seen as an impeding factor in the
decision making process in any institution. It should be viewed as internal litmus test to
identify the bonafide decisions taken in the institution, irrespective of the fact whether the
decision taken has resulted in loss to the institution or not. It is not that all decisions which
result in loss to the banks are to be viewed as decisions taken with ulterior motives but, at
the same time, the banks need to go into the merits of each decision so that actions taken
with ulterior motives and without clear adherence to the laid down procedures can be
recognised, segregated and dealt with incisively. The role of the vigilance structure
envisaged in the banks has to be to strike a fine balance between the role of risk taking
which is the raison d'être of banks and the responsibility as trustees of public deposits.
9. The incidence of frauds and levels of NPAs in the banking system have been on an
upswing for quite some time now. I would return to these specific issues a little later in my
address, but, at this stage I would like to emphasize that the adverse developments like
rising incidents of frauds and ballooning of NPAs in the banking sector and similar adverse
outcomes like mispricing of national resources in other public sector entities and the
Government departments has led to a situation, where vigilance function has become
extremely critical to ensure good governance standards and probity in the implementation of
projects involving public money. The primary reason for such adverse outcomes is that a
large majority of such projects are mainly supported by debt (whatever equity is brought in is
mainly money raised as debt or quasi debt) and hence key stakeholders in the project i.e.
borrowers, lenders and administrators have virtually no downside risk from the failure of
projects, but substantial upside return. Only stakeholders who have some downside risk are
the politicians primarily due to compulsions of electoral politics and media gaze, which is,
understandably, of very short term nature. There is virtually no accountability for the top
decision makers and on most occasions it is only the public interest that is sacrificed. In such
an environment, vigilance administration in the public sector undertakings becomes very
critical and needs to be carried out with extreme care and clarity.
Three aspects of vigilance administration
10. There are three aspects to the vigilance function - Preventive, Punitive and Participative
- (surveillance and detection). In normal course, banks should strengthen preventive
vigilance functions by inculcating a sense of honesty and integrity among its employees and
establishing internal systems and controls, which would act as a defence against malafide
activity. Preventive vigilance function is, perhaps the most crucial and yet, the most
challenging of the three aspects of vigilance that I mentioned earlier. It is crucial because it
has the potential to prevent lapses from occurring by stemming the rot at the initial stages
itself. However, it is challenging because it needs to be a continuous exercise across all
levels of the organization and demands the focussed attention of the management. This
involves keeping close watch on the activity profile and the life style of the employees. The
employees, who maintain a flashy life style without accounted for means to support such life
style, who rarely take leave, who do not share the finer points of work with fellow colleagues,
who take extra interest in the work assigned to others, who are ever ready to help vendors
dealing with the institution, who are under debt etc., need to be closely watched from a
vigilance angle.
11. This should be followed by strengthening participative vigilance function which
encompasses reviewing the existing systems and control, identifying lacunae and putting in
place sufficient red flags so that the scope for misconduct is minimised and transgressions
are detected swiftly. The systems of the institution which allow the employees to take
independent decisions without subjecting them to "four eye principle", allowing use of
excessive powers without scrutiny, giving unrestrained financial powers to individual
employees, allowing employees to change the terms and conditions of any contract without
involving the original sanctioning authorities etc. need to be reviewed and proper checks and
balances need to be put in place to avoid misuse of powers by individual employee for their
personal benefit. When the precautions become part of the culture of the organisation, the
same also act to improve the surveillance and detection vigilance function in any
organisation.
12. To strengthen the preventive vigilance function in any institution, involvement of all
stakeholders irrespective of their standing in the institution can play an important part. For
example, if any branch manager accommodates any constituent after the office hours for
some pecuniary benefit for himself or his close friends, the best source to collate information
about the activities of such branch manager may be subordinate staff who may be present in
the office during this period. Similarly any information about the nefarious activities of officials
dealing with outside vendors can be collected through market intelligence.
13. Holding periodical workshops and training programmes for the dealing staff on vigilance
aspects to sensitise them about the need to be cautious while dealing with outsiders and
making them aware about the penal provisions which an employee will be subjected to
following detection of his involvement in such nefarious activities is one of the most effective
tool of participative vigilance as it instils a sense of responsibility in the minds of employees
and serves as a warning against engaging in self enriching activities at the cost of the
interests of the organization.
14. The concept of whistleblower is another effective tool for preventive vigilance which acts
as deterrent for the employees to keep themselves away from such activities. The
whistleblower is generally an insider who has near full knowledge of the nefarious activities
of fellow worker or higher official and can provide clinching evidence against the delinquent
employee when required. The management should support the culture of whistleblowers in
their organisations so that this channel of information gathering from the inside sources can
be nourished and built into an effective arm of the vigilance function.
15. With regard to concept of whistleblower, perhaps it will be appropriate to quote Churchill
who had said "Courage is what it takes to stand up and speak, Courage is also what it takes
to sit down and listen". I would urge all of you who are present here and are entrusted with
vigilance functions in the respective organisations to remember Churchill's words to
encourage employees to speak up when they come across activities which are not in the
interest of the organisation. The decision makers in the organisation should also show
courage by listening to somebody who may be speaking necessary but unpalatable truths.
16. Punitive vigilance is the most important and most dreaded part of the vigilance function in
any organisation. The management can use this function to instil a sense of responsibility
and accountability amongst its work force. To make this tool really effective, the management
should strive to complete the investigation process promptly without any bias and impose
penalty which is commensurate with the gravity of the offence committed and the loss
suffered by the organisation. For this purpose, there need to be close coordination between
the organisation and investigating agencies like police/ CBI/ CVC. Care should be taken to
place bonafide business decisions on different footing from decisions guided by ulterior
motive of deriving undue personal benefit from the transactions. This is important to ensure
that the decision making ability is not impacted adversely.
Progress in vigilance administration in banking sector: RBI's experience
17. Our experience with implementation of these three aspects of vigilance function by the
banking industry does not inspire enough confidence. Our observation is that preventive
vigilance does not get the desired focus while surveillance and detective vigilance function is
almost non-existent. The punitive vigilance aspect is also not implemented with required
objectivity and alacrity.
18. In banks, credit related decision making has a very high potential for indulging in unfair
and corrupt practices, but at the same time, it is extremely difficult to establish that officials
have resorted to such practices. One of the manifestations of the vigilance failure is a sharp
increase in the number of high value advance related frauds especially in the public sector
banks (Annex 1). In this context, I must admit that there are definitional incongruities
surrounding fraud and there is a need to draw a clear distinction between a crystallization of
business risk taken in normal course and a fraud. My own view is that unless the borrower
disputes his liabilities or the advance is not utilized for creating any asset or its deployment is
in complete disregard to the purpose for which the sanction and disbursal is made or unless
fund is siphoned off by the borrower, the advance should not be treated as a fraud. However,
notwithstanding the definitional part, we observe a tendency on part of the sanctioning
authorities to brandish their credit appraisal failure as a fraud perpetrated by the borrower. I
am not sure how a borrower who has maintained good banking relationship with the banks
for a few years suddenly becomes a fraudster. My assessment of the situation is that, in such
cases more often than not, it is the failure of the credit appraisal and post disbursement
supervision processes which results in accounts becoming non-performing or being
classified as fraud. This state of affairs in public sector banks is a reflection of a general
lowering of guard by the vigilance administrators in banks.
19. Our analysis of large value frauds (greater than Rs. 50 crore in value) has thrown up
some interesting conclusions like an inordinate delay in declaring the accounts as fraud
(Annex 2), covering too many officials in the probe, holding junior officers responsible for
frauds etc. We have also observed that in frauds in consortium/Multiple Banking
arrangements, while some banks do not find any staff accountability, several others do the
opposite(Annex 3). Our analysis also suggests that out of 719 officers who were found
accountable in 230 large value fraud accounts in the banks over a period of time, 426 officers
were up to the rank of Senior Manager, 196 officers were Chief Managers and AGMs,
94 officers were of the rank of DGM, GM and CGM and only 3 Officials were from the Top
Management and the Board of Directors. This statistic highlights the skewed nature of our
punitive vigilance process and its tendency to focus on the lower level functionaries. Another
factor which greatly erodes the efficacy of the vigilance function is the disconnect between
the punishment meted out and the offence. We observe that in public sector banks, most of
the officials found liable were let off with minor penalties - caution, warning, censure,
stoppage of increments for limited period etc. which sends out a wrong message - a
message about passive tolerance rather than active intolerance towards misconduct!
Incidentally, private and foreign banks operating in India adopt a no nonsense approach as
reflected by the quantum of penalties imposed for similar misdemeanours including dismissal
from service.
20. Based on our analysis of large value advance related fraud cases, I would like to
highlight following issues for closer scrutiny by the vigilance administration in banks:
(i) Dragging in too many people in the ambit of probe not only delays the process but
also scuttles the identification of actual perpetrators
(ii) Holding lower rung officials accountable for frauds even though the sanctioning of
advances is usually at the level of senior executives/Board
(iii) The officials at junior level should be brought under the ambit of probe for
accountability only if there is deficiency at the monitoring/implementation level
(iv) Establishing accountability in all member banks even in the case of
consortium/Multiple Banking arrangements where there is common tendency on part
of the member banks to absolve themselves of all responsibilities and squarely
blame the lead bank for deficient credit appraisal/ post-disbursement monitoring
21. Therefore, what is of essence is the speed with which the fraud is acknowledged,
investigations are concluded, staff accountability is fixed and deterrent action is taken. While
on the subject of fraud in banks, let me also raise another wider issue. As vigilance officials
your focus is on the internal staff but what about the fraudulent borrowers. Who ensures that
they are appropriately punished? I feel there is an urgent need to ensure that the system
joins hands in punishing the perpetrators of frauds including an outright refusal of banking
facilities to them. Similarly, stringent and exemplary action including debarment from further
hiring also needs to be taken against professionals like chartered accountants, lawyers,
valuers who aid and abet the fraudulent practices.
Vigilance administration: the non-financial aspects
22. Let me now come back to the issue of examining non-financial aspects as part of
vigilance administration. We see many instances of close relatives of the officials working for
the commercial entities which these officials also supervise. As some of you may be aware
there is a raging furore and an investigation of JPMorgan by Securities and Exchange
Commission in the USA for hiring Chinese "princelings" (the privileged children of ruling
Communist Party leaders) in order to land business in the country. Do we make an analysis
of how many of these recruitments are based on merit and how many of these are
accommodations? Sooner or later, such issues are also likely to come up for debate in our
society. It is important, therefore, that we take cognizance of the problem before it snowballs
into a major controversy. Further, there is also this issue of bureaucrats, regulators,
supervisors taking up appointments with the entities they regulated/supervised, soon after
their retirement. This is an inherently dangerous practice which needs to be curbed with
appropriate polices.
23. Similarly, I have an issue with the concessional pricing extended to the few so called
"special" borrowers on considerations like overall business relationship. Pricing is essentially
meant to cover inherent risks and administrative cost. I do not know how business
relationship brings down the risks inherent in lending transaction or the cost of
administration. In order to eliminate the element of discretion in such transactions, it is
essential that the respective Boards/ Ministries/ Departments lay down well documented
policies/rules for pricing of products and services or national resources. I would urge the
vigilance machinery in the institutions to closely focus on this aspect.
24. To my mind, one of the major sources of corruption is spending beyond sanctioned
authority by the public institutions. There is virtually no accountability for unnecessary or
unethical spending across institutions. The spending is very often hidden in the garb of
legal/audit or regulatory expenses. The problem is more endemic at higher levels where such
spending is never questioned. Do you as vigilance officers probe into these spending? In the
developed economies, there is a system of disclosing the donations made to political parties,
expenses incurred on bureaucracy/regulators/ policy makers etc. I wish to raise a debate
here on why we should not have similar disclosure norms and transparent practices by our
corporates. In the meantime, there is a need for a strong internal control framework for such
expenses, which should necessarily be monitored by the organization's vigilance
mechanism.
25. I would also urge the community of vigilance officers not to go overboard and remain
circumspect while dealing with corruption cases. One has to be able to draw a distinction
between a "tip" and a "graft". It would, perhaps, be in order for the organisations to prepare a
code of ethics which should clearly outline the expectations from the employees while
dealing with the various stakeholders.
Improving effectiveness of vigilance function
26. This brings us to the basic question of how to make the vigilance function more effective
without creating any fear in the mind of employees. In my view, institutions should lay more
emphasis on the preventive vigilance aspect so that the problem may be addressed in the
initial stages itself. Organizations can benefit by inculcating a sense of honesty and
responsibility among its employees. Ownership of the vigilance function should not rest
merely with the few officials manning the vigilance department, it should traverse across the
length and breadth of the organization.
27. In this context, it will be appropriate to quote renowned poet Alexander Pope who said
"An honest man is the noblest work of God. So my friends, there is no substitute to honesty.
Honesty is not a concept or a word. It is a way of life. Honesty pays in life. Dishonest people
may prosper at times but in the end, it is the honest man who wins. Honesty needs no
excuses. Honesty leads to mental peace. It answers your conscience. An honest man needs
no vigilance. It is meant for people who are black sheep in any organization. So, let us all
pledge to be honest in life, not only in our public dealings as public servants but as human
beings to fellow human beings on the earth. One must have a value system and must stick to
that on all costs".
28. The second aspect in my opinion would be a clear and transparently professed
intolerance for misconduct, by both insiders and outsiders. While well laid down vigilance
policy can address the internal requirements, actions such as caution listing of persons
involved in fraudulent activity, information sharing within the industry, creation of fraud
registries, availability and access to credit bureaus can to a large extent help identify and
mitigate threats to vigilance on account of external influences.
29. Thirdly, there is a need to keep yourself updated about what is happening in the industry.
Many times people who are posted in vigilance departments feel that there is nothing much
to learn apart from the vigilance manual. Some also feel dejected that they are out of the
mainstream of the organisation. In my opinion these are very myopic views. People entrusted
with vigilance should be as updated as people in marketing. In fact, I may add that people
involved in the vigilance function need to be abreast of developments across business lines
and verticals as compared to their colleagues in other departments who only need to be
updated on developments in their respective operational areas. Only if you know what is
happening around you or what is the trend or what are the features of the new product that is
being rolled out can you be vigilant and quickly put in safeguards.
30. Finally, management and investigative agencies must be sensitive enough to differentiate
between the negative consequences arising out of bonafide decisions and those arising out
of malafide intentions. There should be a robust vigilance system in place for prompt
investigation and the guilty should be brought to books by imposing exemplary punishment to
act as a deterrent for others. No doubt, this is a tough call, particularly when adherence to
disclosure requirements and good corporate governance standards may result in adverse
publicity and avoidable public enquiry. However, an impartial and adept vigilance function
can also serve to enshrine the culture of integrity within the organization and enhance its
reputation and standing in the eyes of the world.
Conclusion
31. An improvement in efficiency of public delivery service and an efficient utilisation of public
funds is incumbent upon efficient governance process which, in turn, depends upon a
responsive accountability regime. The Governance process can only improve if the
organisations have a culture, which encourages officials at all levels, right from the Board
downwards, to be accountable for their actions. It is in this context that the vigilance officers
have their task cut out. Rather than focussing solely on the punitive aspect, the vigilance
machinery has to work on the preventive and participative aspects and have to help promote
a culture which breeds probity and integrity.
32. As a concluding thought, my advice to people in vigilance administration is:
•
Know the essence of the vigilance function - What is expected of you?
•
Evaluate decisions against two tests - Was it for the good of the organisation? Was
it done at the cost of the public /common good?
•
Have an open and inquisitive mind - Be aware of things that may affect the interests
and good governance in your respective organizations
•
When the rest of the organisation is looking to push business interests, focus on
ensuring that ethics and values are not lost sight of
33. If you bear the above thoughts in mind while attending to your call of duty, I am sure the
objective of vigilance function would have been well served. I once again thank CIGVA and
Mr. Handa for inviting me to this seminar and giving me an opportunity to interact with the
participants representing a wide cross-section of the public sector. I observe that CIGVA has
assembled an impressive set of speakers with vast practical experience and I, therefore, hope
that you would have two very interesting days of deliberations. I hope some of the issues that
I have raised this morning would be debated during the course of the seminar and some
actionable ideas on improving the Governance process in public sector enterprises would
emerge from these deliberations. I wish you the very best in all your future endevaours.
Thank you!
Annex 1
Annex 2
BIS central bankers' speeches
Annex 3
BIS central bankers' speeches