IGIDR Working Paper: Indian Banks and the Prevention of Corruption Act: Freedom and discipline

NO : WP-2018-021

AUTHOR : Ashima Goyal

TITLE : Indian Banks and the Prevention of Corruption Act: Freedom and discipline


Selfless activists like Mr. Pai teach us the importance of continuously interrogating the functioning of
our democracy. The NPA issue has persisted for almost a decade. It has eroded the profitability of
banks, and is a problem for depositors, although sovereign guarantee mitigates concerns. Since large
infrastructure loans were made to private firms, there were fears of private enrichment at the expense of
the tax-payer. The institutions to curb corruption were geared to a control regime, and in the
post-reform market-based system did not make the crucial distinction between crime and risk-taking.
Their actions paralyzed decision-making and delayed resolution. The Prevention of Corruption Act has
recently been amended, but partly because the differing requirements of a control and market-based
system are not well-understood some have criticized it as being too soft on corruption while others see it
as continuing to hurt decision-making. After examining the combination of discipline and freedom a
market-based system requires we assess the 2018 amendment on those criteria. We also more broadly
examine changes in incentives and social norms that are likely to reduce corruption as well as
resolution delays.

Keywords : Public sector banks; Non-performing Assets; Prevention of Corruption Act
JEL Code : D73, D71, G38

Weblink : http://www.igidr.ac.in/pdf/publication/WP-2018-021.pdf