RBI warns of fallout of excessive oversight, but at the same says that guilty should be punished

MUMBAI: The Reserve Bank of India warned that excessive oversight would kill risk taking by banks. But at the same time when one is caught with a malafide intent, he should be punished, a top Reserve Bank of India official said.
Responding to a question at an SBI conclave in Mumbai on whether RBI would come to the rescue of well meaning bank officials who are haunted by the three Cs - the CBI, the CAG and the CVC at the time of retirement people and are hence shy of lending, RBI governor, Raghuram Rajan hinted at punishment if one is caught guilt. But at the same time excessive oversight too could backfire.

"I keep saying that we should be careful about excessive oversight and excessive after the fact...if bankers are to take risks there has to be an acceptance that some loans will go bad. That is the nature of risk, some projects will fail some loans will go bad. Rajan said." That said, "when you catch somebody who has exhibited malafide intent, we should act quickly and punish efficiently."

Elabirating himself, Rajan clarified that after the fact ( the lending by a banker), one can scrutinize and review the decision. Sometimes it will seem that certain aspects which should have been considered weren't considered, it would look like poor due diligence. But sometimes one doesn't know enough. "It is very hard to put yourself in the ex-ante situation completely and see what ought to be done."

Given that, if there is some evidence of money changing hands, one could carefully scrutinise the matter to start with rather than presuming that any decision got bad reflects malfide intent. But at the same time, if one has malafide intent, there is a case for quick action and punishment. "But for most part business judgement should be trusted and we should allow space for that. Otherwise we are going to kill risk-taking, kill decision making. We need some oversight but the oversight must not kill judgement." he said.