Millennium Post

PSBs lead banks frauds

Since the Nirav Modi-Mehul Choksi fraud at Punjab National Bank (PNB) came to light at the end of January, a series of banking frauds have been unearthed at disturbingly regular intervals. The PNB scam that was pegged at Rs 11,300 crore has grown in proportion as the bank has recovered several more Letters of Undertaking and Foreign Letters of Credit worth Rs 1,251 crore which have allegedly been used by the companies linked to Gitanjali Gems. After the Modi-Choksi frauds, Rotomac Pens' Chairman and Managing Director Vikram Kothari was charged with swindling nearly Rs 4,000 crore worth of bank loans availed from a consortium of seven public sector banks (PSBs). This was followed by the revelations that one Delhi-based jewellery house, Dwarka Das Seth International Private Limited, availed bank loans worth nearly Rs 400 crore in 2014 and the promoters of the company have since disappeared. And, this was followed by the CBI registering a case against Simbhaoli Sugars for defrauding Rs 110 crore from the Oriental Bank of Commerce. As analysts have been pointing out—the PSBs are sitting over a pile of bad loans and after the Modi-Choksi scam, several more such similar frauds are likely to be reported by the banks. In less than a month since the Modi-Choksi scam came to light, there have been three more cases of banking frauds that have been reported to the Central investigative agencies. Looking at the number of bank frauds that came to light in the first two months of the New Year, the government has asked the banks to scan all bad loans worth Rs 50 crore and above. The government has also asked banks to fix operational risks within 15 days. As the ambit of frauds at PSBs has been expanding, the CBI has also questioned Former Managing Director of PNB and current Managing Director and CEO of Allahabad Bank Usha Ananthasubramanian and Executive Director of ICICI Bank NS Kannan. The CBI has clarified that they are being questioned in the perspective of the accused. And finally, Nirav Modi's international business arm Firestar Diamond has filed for bankruptcy in the US.
The fact that in so many banking frauds, none of the private sector banks has been involved or lost money is a grim reminder of the fact that it is the PSBs that have been unable to protect themselves from being defrauded by their clients while the private sector banks are successful in protecting themselves from the fraudsters. This makes a case for Public Sector Banks to be handed over to private management. The Central government has pumped Rs 2.6 lakh crore in the past 11 years into the PSBs. But that has not improved the banks' lending capability. The poor financial health of PSBs can be attributed to the high scale of Non-performing Assets (NPAs), which, as per an estimate, stands at above Rs 6.5 lakh crore. When so much of money turns into NPA, there are certainly loopholes in the banking system, which cannot be changed much as long as the management of the PSBs is vested with the political masters. To run the PSBs efficiently and in a fair manner, the banks have to learn certain things from their private sector counterparts. A day earlier, Finance Minister Arun Jaitley had rapped the banking sector regulator and auditors for not being vigilant against the frauds. Now, the government has announced the setting-up of a government agency—National Financial Reporting Authority—which will regulate and discipline the auditors. This will take away the review and disciplinary roles of the Institute of Chartered Accountants of India.
As the PSBs are holding a large sum of money under NPAs, more frauds are likely to emerge from the banking sector. As most of these bad loans are stuck in court cases, there is virtually nothing that the government can do to improve the prevalent situation. The only thing it can do is to put more safeguards in the banking system and pursue the court cases earnestly so that those who have defrauded the banks are brought to justice and the banks' money is recovered from them. The banks should also try and streamline its lending policies and favour small entrepreneurs over the big corporates. In a country like India where the population is large and the government is saddled with the responsibility to provide jobs to all those who are unemployed, the banking sector can play a decisive role. By offering easy loans to small entrepreneurs, the banks can help people set up their businesses and instead of asking for a job, they can create some jobs for others.

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