The arrest of Sudhir Kumar Jain, chairman and managing director of Syndicate Bank, on allegations of bribery might stifle credit flow to small businesses, bankers say.
On Saturday, Jain was arrested by the Central Bureau of Investigation for allegedly accepting a bribe of Rs 50 lakh (Rs 5 million) to increase the credit lines of certain companies.
Bankers said fear of loan losses impairing their careers could make officers wary of sanctioning new loan proposals on their own.
“Sanctioning of small loans will bear the brunt.
"This is a high-profile case and officers at the branch level will be extremely reluctant to approve credit proposals.
"The economic slowdown has already put stress on the quality of loans and no one will want to take a decision in the current environment,” said a former chairman and managing director of a public sector bank, requesting anonymity.
Recent studies suggest the action of law enforcement and investigative agencies have had a negative impact on lending by PSBs.
It was found overall lending had fallen dramatically in branches facing action by the Central Vigilance Commission.
Also, there is a contagion effect, as lending in branches located in proximity to the affected one takes a hit.
“The impact of CVC action on lending is persistent; it takes slightly more than two years from the time of such action for lending to recover, and the impact of the consequent loan officer conservatism is predominantly felt by small borrowers, traditionally considered by banks as opaque and risky,” a PJ Nayak-headed