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Preventive Vigilance The Key Tool of Good Governance at Public Sector Institutions1
Urjit R. Patel, RBI
Speech at the Central Vigilance Commission, New Delhi, 20th September 2018
"He is most free from danger, who even when safe, is on his guard."
- Publilius Syrus (1st Century B.C.)
It is an accepted norm of organising human societies that with the right to liberty comes
good governance, the latter being designed around laws (formal governance) or norms (informal
governance) restricting excessive exertions of the right to liberty: Where individual actions are
deemed to create adverse spillovers ("negative externalities") on the rest of the society, laws or
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norms backed by an enforcement machinery draw a line as to what is acceptable human
behaviour. Governance could be for the society as a whole or an individual firm or entity or a
group of entities (e.g., the public sector). An important term we all come across in our
functioning, especially in the public sector, is Vigilance, which is the essence of what all of you
are attempting to achieve at the Central Vigilance Commission, established in 1964 by the
Government of India, to address corruption in the government sector.
Vigilance is defined in dictionaries as "action or state of keeping careful watch for
possible danger or difficulties."
It takes several forms, which are often classified as:
(1) Preventive vigilance, which is aimed at reducing the occurrence of a lapse (violation of a
law, a norm, or, broadly speaking, a governance requirement);
(2) Detective vigilance, which is aimed at identifying and verifying the occurrence of a lapse;
and, finally,
(3) Punitive vigilance, which is aimed at deterring the occurrence of a lapse.
The first part of what follows will provide a conceptual framework, based on the economic
theory of incentives, which helps understand these various aspects of vigilance, how they interact
with each other, and why preventive vigilance often takes centre stage in the government or
public sector institutions as an essential tool of good governance.
Gary Becker's "Crime and Punishment"
The modern economic theory of corruption and how to prevent it emanates largely from Gary
Becker's insightful and seminal pieces on Crime and Punishment during 1968-1974. Gary
Becker, a young economist at the University of Chicago, took the theory away from moral and
ethical basis to one based on optimal human behaviour in response to the presented economic
incentives. He examined his own behaviour with regard to undertaking parking violations when
rushing to work, which involved trading off the expected cost of illegal parking in a convenient
spot, which he roughly calculated as the likelihood of getting a parking ticket violation
multiplied by the parking fine (assuming non-payment of the fine would be too costly not to pay
up) against the benefit in the form of convenience and reaching his class in time. Often, this
calculation prompted him to opt for the parking violation, as legal parking in an inconveniently
located garage did not seem economically attractive!
Becker extrapolated from his own daily behaviour to an important economic insight. [As
an aside, "economics" derives from the Greek word "oikonomika" (οἰκονομία),
which means
"household management" and
was the name of a treatise by Aristotle.] The insight was that
criminals in society do the same calculation of the probability of getting caught times the
potential punishment while determining whether to choose a criminal lifestyle and what crimes
to engage in; conversely, if criminals responded in this manner to economic incentives rather
than (only) because they had character flaws or mental illnesses, then how should laws and their
enforcement be organised taking into account the costs of enforcement, and might it be
excessively costly and economically undesirable in practice to reduce crime rates to zero?
Building on this fundamental insight that governance lapses may be rational choices
rather than mental illnesses or character flaws in transgressors, we could consider a simple but
instructive conceptual framework that may help understand how preventive, detective and
punitive vigilance work with each other and should be designed given the rational best response
of citizens or employees, who given the incentives, will all be treated uniformly as potential
offenders.
A conceptual framework
The framework is illustrated in the following schematic of how vigilance and employee actions
are sequenced in a typical institutional setting. Let us walk through it step by step.
The employee is in control of an action whose outcome can be "good" or "bad". If the
outcome is good, the firm's cash flow or value is higher at
H as compared to L, when the
The employee's "effort" is denoted
outcome is bad (L < H). as p and determines in part the
likelihood that the outcome would be good (the rest being purely due to chance or background
noise). The employee bears an exertion cost from undertaking this effort (so all else equal,
prefers shirking), or alternatively has some private gains (side benefits from a bad-outcome for
the institution). This cost creates a potential wedge between what is privately optimal for the
employee and what is optimal for the institution.
Recognising this wedge, the institution (or its regulator) puts in place preventive
vigilance (v), detective vigilance (q) and punitive vigilance (d):
Preventive vigilance (v) reduces the likelihood of employee control over the action in the
first place, i.e., it puts in place safeguards such that employee lapses are less likely to occur.
Detective vigilance comes into play before the outcome has actually been realised (this is
shown in the schematic as the oval box around the outcomes H and L). Its precision is denoted
by q. The higher the q is, more precise is detective vigilance in identifying the good (bad)
outcome indeed as the good (bad) outcome; conversely, (1-q) captures the error rate of detective
vigilance whereby it detects the good (bad) outcome as bad (good). [There are alternative ways
of modeling detective vigilance. For instance, it may seek not just to identify when the outcome
would have turned out to be low, but also aim to "nip it in the bud" so as to reverse it to a good
outcome. In other words, detective vigilance in some cases may catch lapses and correct them. In
yet another variant, detective vigilance could also be modeled as identifying only the low
outcome possibility with some likelihood but not being able to reverse the outcome. Depending
on the setting, one formulation may be more suitable than the others.]
Punitive vigilance reduces the employee reward in the good-outcome scenario, denoted
d > d.R
as R, to (1-d).R, in the bad-outcome scenario, where 0. The punishment serves an
incentive for the employee to invest in increasing the good outcome likelihood. Typically, in
such setups, the value of R < H is pinned down based on the employee contract being attractive
enough relative to reservation opportunities such as alternative job offers for employees or
payoffs from remaining unemployed.
An example can help visualise the structure more concretely. Consider for instance
procurement at a government institution. Efficient procurement would lead to a higher value for
the institution by ensuring quality is met at the cheapest cost. In order to reduce employee
discretion in the procurement process which could potentially lead to compromised choices,
preventive vigilance is put in place in terms of designing the procurement process ("L1"),
requiring procurement be undertaken only through, e.g., an electronic tendering process, etc.
Detective vigilance is also put in place in the form of a concurrent/internal audit within each
department of the institution that tries to ensure lapses are caught and fixed before they lead to
the final procurement decision. Finally, in case of a violation of procurement guidelines is found
ex post in spite of the other vigilance mechanisms, the central vigilance office of the institution
undertakes a disciplinary action against the involved employee.
Technical assumptions
Let us then come back to the conceptual framework for vigilance. To derive the equilibrium
solution in the setup and understand its properties, the following intuitive assumptions are made:
•
Employee effort (p) leads to exertion cost that is progressively costly (increasing and
sufficiently convex) so as to rule out the corner solution that perfect governance can be
implemented in practice.
•
Similarly, investing in preventive vigilance (v) and detective vigilance (q) become
prohibitively expensive beyond a point, i.e., the costs of increasing v and q are increasing
and convex enough so as to rule out the corner solution of perfect governance.
•
In similar vein, there are limits on punishment levels: one being that there is limited
so that employee's pecuniary reward even in the
liability bad-outcome scenario can only
<
be positive (d 1) even if it is lower than the reward in case of the good outcome;
further, there may be lower bounds on the bad-outcome reward as the institution may be
constrained by (un-modeled) side-effects such as the costs of dealing with grievance
redressal and legal recourse being undertaken by the employee in case the punishment for
low-outcome scenario being realised is too severe.
Key "insights"
Gary Becker's seminal analysis, this simple framework for understanding
Along the lines of
vigilance leads to the following insights:
1. Detective and punitive vigilance are strategic complements: The greater the punishment, the
more useful it is to detect. Conversely, having a high penalty is ineffective (given
concomitant side-effects or costs) when the quality of detection is poor.
2. Preventive and detective (as well as punitive) vigilance are strategic substitutes: The lower
the detection and punishment, the more useful it is to prevent lapses at the outset since
detective and punitive vigilance do not provide adequate incentives. This is important and
will be discussed further in the context of public sector institutions.
3. Preventive vigilance dominates other forms for dealing with lapses outside of control: The
above schematic potentially allows the analysis of how to tackle vigilance design with human
effort (which is under one's control) versus human error (which is outside one's control). As
an extreme case, suppose that there is no control under the employee to affect the outcomes
(p is fixed). Then punishment achieves absolutely nothing in improving outcomes. In this
case, preventive vigilance which effectively reduces the chance of a lapse in the first place
dominates detective and punitive vigilance. Detective vigilance may nevertheless be effective
in identifying lapses which occur due to pure chance and possibly for reversing the bad
outcomes to good ones.
Dynamic considerations
Outside of the simple one-period or static model outlined above, there are important dynamic
considerations that may be important in real-world design of vigilance processes.
One, it might be attractive for an institution to undertake punitive vigilance beyond what
is desirable in a purely myopic sense for the purposes of setting a "precedent"; in other words, so
as to deter recurrence and build a reputation or create a credible culture for zero or low tolerance
for repetitive lapses.
Two, in practice poor governance outcomes may not simply be due to optimal incentive-
based behaviour, but also due to the presence of habitual offenders (an employee "type", so to
speak). In such a setting, there may be learning over time on a given employee's type that can
help separate type from pure background noise; when this is the case, some weeding out may be
necessary based on initial detection phase which only after a few periods leads to a punitive
vigilance outcome as it becomes certain that employee type is above a threshold in terms of
repetitive lapses that cannot be attributed over time to just chance.
Let us now turn to why these observations imply an essential role for preventive vigilance
in good governance, especially in public sector institutions.
What vigilance is likely to work the best in a public sector institution?
Punitive vigilance is difficult in a public sector institution for several reasons. The rewards are
low to start with, thereby limiting the possibility of downward revisions. Given this constraint,
disciplinary actions that limit the chances of career progression are often the preferred
punishment. However, this has the misfortune of demotivating employees beyond the point of
their career when punitive vigilance action is undertaken. This could, in principle, be dealt with
a "golden handshake"; however, the insurance that public sector jobs offer is often a key
attractive feature of these jobs given the lack of significant upside financial rewards. While there
are ways to fine-tune pecuniary incentives and career-based rewards for greater effectiveness
even within these constraints, it is fair to conclude that their "bite" is not as strong as in the
private sector.
In turn, given the first insight (Key insight 1) from the model, detective vigilance too is
rendered somewhat ineffective. Put simply, detection does not lead to punitive outcomes (except
perhaps in extreme or egregious cases and over time) so that investment in detective vigilance
does not guarantee the desired reduction in incidence of lapses, even though it might help in
some cases arrest the slide and contain with remedial measures.
As a result, given the second insight (Key insight 2) from the model, preventive vigilance
takes center stage and becomes a key effective tool of governance in a public sector institution.
When lapses can arise due to background noise outside of the employee control (which is often
the case in public sector due to the complexity of the interaction with a multitude of other public
sector entities), punitive vigilance becomes even less attractive due to further demotivation that it
might induce; in turn, so does detective vigilance. In other words, while not taking away from
the need to engage in some detective and punitive vigilance, preventive vigilance is conceptually
likely to be the most effective governance mechanism at public sector institutions.
These observations have substantive relevance for understanding how one might tighten
governance in practice, for instance, in lending outcomes (underwriting or screening, monitoring
and recovering post default) at public sector banks, a setting that is beset with many of the
features highlighted above. That is for another day. For now, let us turn to how vigilance is
organised at the Reserve Bank of India, the central role that preventive vigilance takes at the
Bank, and the measures that we have adopted to date in this regard.
Vigilance functions at the Reserve Bank of India (RBI)
The overall responsibility for vigilance work at the Reserve Bank vests with the Central
Vigilance Cell (C. V. Cell or just Cell), which exercises its jurisdiction over all employees of the
Bank and co-ordinates the activities of the 49 Branch Vigilance Units. The Cell maintains
liaison with the Central Vigilance Commission (CVC) and the Central Bureau of Investigation
(CBI). The focus of the Cell is to have a comprehensive preventive vigilance setup supported
by an audit framework so that vigilance issues are minimised and to sensitise our employees to
various aspects of vigilance administration.
The guidelines on vigilance, issued by the CVC, are aimed at greater transparency,
promoting a culture of honesty and probity in public life, and improving the overall vigilance
administration in the organisations within its purview. The Central Vigilance Cell at the Reserve
Bank, led by the CVO, follows the guidelines issued by the CVC (the Commission) from time to
time. The Chief Vigilance Officers (CVOs), who are the extended arms of the Commission in
their respective organisations, decide upon the possibility of a vigilance angle in individual cases
in an organisation. Not only the financial propriety of transactions, but certain non-financial
aspects arising inter alia from conflicts of interest, nepotism and considerations of post-
quid pro
retirement employment as a quo, are also required to be examined from a vigilance
angle.
As mentioned earlier, the Bank's vigilance administration
focuses on preventive
vigilance functions by inculcating a sense of honesty and integrity among its employees and
ensuring that sound internal systems and controls are laid down, which act as a defense against
intended mala fide activity by any employee. This is borne out by the fact that the incidence of
vigilance cases in the Bank has been negligible. Over the last four years, the percentage of
vigilance cases against RBI employees' vis-à-vis the total staff strength of the Bank stood on
average at 0.004 per cent. Further, in terms of complaint cases received against RBI/RBI
employees over this same period, the percentage that required punitive vigilance action stood on
average at 0.081 per cent. We continue to endeavor to maintain high standards of integrity. Let
me highlight some of the preventive measures taken by the Bank as a part of this endeavour.
Preventive vigilance measures at the RBI
The RBI Staff Regulations 1948 constitute one of the earliest attempts at prescribing preventive
"Do's and
vigilance measures. The Regulations contain various Don'ts" for the staff. A Code of
Ethics was also framed subsequently in 2013 titled "Ethics at Work." Preventive vigilance
measures emanating from these Regulations and the Code are enforced partly at the individual
level, and, partly at the organisational level.
At the individual level, instructions are in place requiring an officer to obtain prior
permission for certain transactions (e.g., acquisition of immovable property and taking a loan
from a financial institution); reporting of certain transactions (acquisition of movable assets
above a monetary limit and employment of family members in financial institutions); and
upfront disclosure when the employee has a personal interest in any official transaction which
(s)he is dealing with.
At the organisational level, the preventive vigilance measures in place include
identification of sensitive posts, surprise visits by senior officers to vigilance sensitive areas,
incorporating vigilance related sessions in the Human Resource (HR) related training
Bank's
programmes at the training establishments, sensitising new recruits on various aspects of
vigilance and proper conduct, periodical rotation of staff, well laid down recruitment procedures
and procurement policies, close monitoring through CCTV of sensitive areas in the cash
department, institution of an effective grievance redressal machinery for the staff and persons
who have official interaction with the Bank, etc.
As part of these preventive vigilance measures at the organisational level,
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The Central Vigilance Cell brought out a Compendium of instructions on Tenders and other
vigilance matters for the benefit of the staff. The Premises Department of the Bank also has
a manual for all procurement. The Cell, during the course of the Vigilance Awareness Week
2017, launched a separate site on our intranet site (called the "EKP") where all vigilance
related information is available in one place.

In March 2017, the Cell organised a training programme at the College of Agricultural
Banking (CAB), Pune, wherein the Chief Technical Examiner of the Commission addressed
the officers of the Bank dealing with procurement activities and provided them with valuable
tips on addressing vigilance issues that arise during the process of procurement.

Another training programme for the senior officers of the Bank was organised in September
2017 at the CBI Academy in Ghaziabad to sensitise officers on the investigative aspects of
vigilance.
 A workshop on 'Principles of procurement and related case studies' was
recently conducted
at Mumbai for the benefit of officers dealing with procurement. Further, a Video Conference
was held to enhance awareness and to review the status of implementation of e-tendering.
An important feature of preventive vigilance at the Bank is internal governance, i.e.,
involvement of employees themselves for disciplining each other. For instance, as a step
towards further strengthening preventive vigilance in the area of procurement, the Bank has
introduced the concept of "Integrity Pact" (IP) for large value procurement (exceeding Rs. 5
crores) and the pact is overseen by an Independent External Monitor (IEM) appointed by the
Bank with the concurrence of the Commission. The Integrity Pact (IP) is an agreement between
the prospective bidder (vendor) and the buyer not to resort to any corrupt practices in any stage
of the contract. The Pact between the vendor and the buyer involves their primarily agreeing to
refrain from bribery, collusion, etc., during the entire process of the contract. The Independent
External Monitor independently reviews whether and to what extent parties to the Pact have
complied with their obligations under the Pact. In case of a suspicion, the IEMs examine all
complaints received for breach of Pact and furnish their views to the Chief Executive of the
organisation or directly forward the findings to the CVO and the Commission.
Several other measures are also aimed at instilling strong internal governance. To ease
lodging of vigilance related complaints, the name, address, telephone/fax number and e-mail
address of the CVO is displayed on the website of the Bank. The Cell has also put in place a
whistle blower policy for the Bank so that instances of corruption can be exposed by an
the complainant's
employee without fear of retribution, or without identity being disclosed.
Finally, with a view to promoting transparency in our functioning and restricting ad-hoc
exercise of powers, the Bank has taken additional measures such as:
 on the
Providing substantial disclosure Bank's website regarding its functioning; the
procedures followed in its decision-making; and the timeframe for granting approvals and
permissions.
 a Citizen's Charter, which
Departments that have public interface are required to display
indicates time schedules for diverse activities; for deficiency in service, a publicised
grievance redressal system is in place.

Requirement that whenever any monetary penalty is imposed on a regulated entity, such
decisions are taken by a Committee unconnected with the underlying operation, and not by
any individual officer, after following a due process; the details of the penalties are also
disclosed on the Bank's website.
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All tenders that are floated or awarded by the Bank above a certain monetary limit are
displayed on the website.
Conclusion
Let me conclude. Being a public sector institution, and as argued conceptually above, the
Reserve Bank of India considers preventive vigilance measures as the lynchpin of its efforts for
good governance. The extant preventive vigilance measures at the Bank have helped its
employees adhere to its Regulations and the Code, with any deviations being carefully detected,
scrutinised and remedied. The Central Vigilance Cell at the Bank will continue in its endeavour
to preserve the highest level of integrity at the Bank by sustaining and strengthening these
We look forward to the Commission's support and
preventive vigilance measures further.
- of the Bank's environment -
guidance as we seek in the ever-increasing complexity to
strengthen its preventive vigilance framework, by simplifying rules and procedures as also by
leveraging technology to ensure compliance. Thank you.
References
1968) "Crime and punishment: an economic approach",
Becker, Gary S. (March-April Journal
of Political Economy, Chicago Journals, 76(2), 169-217.
Becker, Gary S. (1974) Essays in the economics of crime and punishment. New York: National
Bureau of Economic Research, Columbia University Press.