Why Indian banks are facing a credibility crisis
Over the past two weeks, more skeletons have been tumbling out of the cupboards (or shall we say lockers?) of state-owned Punjab National Bank (PNB) from which over Rs 12,000 crore was allegedly swindled by fugitive diamantaire Nirav Modi.
In a reply to the Lok Sabha on March 10, finance minister Arun Jaitley said PNB registered losses to the tune of Rs 2,808 crore on account of frauds in 2016-17, almost a year before it unearthed the Modi and Mehul Choksi (chairman of Gitanjali Gems) scams. Sharing a bank-wise list of fraud reported by public sector banks, involving an amount of Rs 1 lakh and above for 2016-17, Jaitley said PNB encountered 158 such cases that caused this big loss to the bank.
This underlines the concern of most industry watchers over the past few weeks, that the PNB scam was just a tip of the iceberg, and the malaise has spread across the entire Indian banking system, with no one in a position to fathom its depth or suggest any conclusive treatment for the rot.
Experts who converged at the recently held India Today Conclave in Mumbai were of the view that the issues in the banking sector were not just a procedural or operational one with PNB, and were systemic. Before plunging into finding solutions to the issue, the first step needed is to acknowledge that there is, indeed, a grave issue in the first place.
Meera Sanyal, former CEO & chairman, Royal Bank of Scotland, says that there is nothing wrong with letters of undertaking (LoUs) per se, but in the case of PNB and other public sector banks, certain departments, which are prone to fraud, have been exploited by fraudsters.
Remember, Modi, in connivance with a few employees at PNB, had raised fraudulent LoUs from the bank to acquire loans from branches of several counterparty banks, until the amount to be paid up reached humongous proportions.
The question is, have all the LoUs issued by PNB resulted in losses to the bank? In that case, it has to be assumed that there were several other officials at PNB who have colluded with Modi to swindle the money from the bank. Many top officials, including the bank’s managing director are being questioned by the CBI, and some arrests have been made. But the public is yet to know how accountable the top management has been in the entire scam.
Banks are already straddled with non-performing assets (NPAs) to the tune of over Rs 7 lakh crore, and the scams have added a new ugly dimension to the banks’ woes. In the post-Lehman crisis, while the world was in turmoil, credit growth in India was at a robust 28 per cent per year. Industrialists were pampered and credit extended beyond limits, says Abizer Diwanji, partner and national leader, financial services, EY.
Several projects that money was lent for either never took off or were subsequently shelved due to a lack of demand, or the non availability of raw materials, or difficulty in acquiring the required land. The first attempt to set this right came in 2015 from Raghuram Rajan when he was the then RBI Governor.
Experts say to tackle the grave issues in banking today, what is needed is a clarity of purpose. The PJ Nayak committee has recommended remunerating public sector bank employees at par with private sector banks, but we haven’t been able to implement such measures so far.
Similarly, the Insolvency and Bankruptcy Code is a brilliant piece of legislation, but it should not be thought of as a solution to all ills. The law seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. It is a one stop solution for resolving insolvencies which at present is a long process and does not offer an economically viable arrangement.
Even after all the attempts to bring down bad loans in banks, what will be ultimately salvaged would not be more than 40 per cent of the distressed assets, say experts. But the start has to be made, and there is nothing like a good crisis to bring about a major change in the way things are run in this country.
(Courtesy of Mail Today)