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.