Millennium Post

Just can’t bank on them

By nature, banks are greedy, highly secretive about their operations and notorious for hedging information. Even the strictest of domestic or international banking regulations – Dodd-Frank in the US and OECD-led Basel II and III – don’t guarantee compliance of all disclosure norms and operational transparency that the so-called safe-keepers and re-investors of public funds are expected to exercise. Yet, banking regulators all over the world are not giving up on forcing banks to be more transparent and ethical in their transactions. Investigative wings of local and global banking regulators are constantly trying to unearth the banks’ illegal transactions unethical practices which affect society, governments and honest investors. If India’s central bank is badly lagging in this regard, it could be because its lack of will and authority. The central bank’s power is often usurped by the government, which indirectly controls the banking regulator, for fiscal as well as political reasons.

Consider the latest actions by the Bank of England to nail the global British bank, Barclays Plc, for its role in manipulating the LIBOR [London inter-bank offer rate], or American banking regulators’ move against HSBC [Hong Kong and Shanghai Banking Corporation] and Standard Chartered, charging them with massive money laundering involving, among others, their India operations. And, contrast how India’s own banking regulator, the Reserve Bank (RBI), and the government have been treating the banking sector, especially foreign banks, pitifully and with kid gloves. Until the recent global exposures of notorious money laundering operations, running into hundreds of billions of dollars, by the two international banks by the US investigators, RBI possibly had no clue about the involvement of even their India operations in the whole illegal banking activities. RBI also has little clue about global money laundering and
operations being conducted by Indian businessmen, politicians, bureaucrats, drug mafia, human traffickers and gunrunners.

HSBC has been under the US regulator’s scanner for nearly five years and many US-based non-resident Indians (NRIs) banking with HSBC are under watch for using the bank as a possible gateway for money laundering and tax evasion. Did RBI pro-actively get in touch with the US regulators or investigators to get to the bottom of HSBC’s India-linked operations? One of the several charges against HSBC is illegal offshore Rupee transactions with suspected terror-linked international outfits. The Indian rupee is non-convertible on capital account. If the charges are true, how did HSBC store or transfer Indian currency abroad? Does RBI know anything about it? If it does, what action has it taken against HSBC’s India operations since the issue became a global concern over a month ago?

The UK-based Standard Chartered Bank – Stanchart, in short – has been accused of laundering over $ 250 billion, some of it having India links, by New York’s banking regulator. Interestingly, Stanchart took over, in the mid-1990s, Grindlays, the largest foreign bank to operate in India for years until nearly two decades ago. Grindlays was accused in 1972 by RBI and the government of illegally repatriating huge amounts from India as ‘inflated’ head-office expenses. The bank’s India operations, which were merged with those in Australia and New Zealand to combine as ANZ Grindlays, were not only let off lightly but also allowed to expand its rupee business at the cost of Indian banks.

The LIBOR manipulation has massive financial repercussion on Indian industry, whose external commercial borrowing (ECB) has shot up in keeping with ever increasing imports. The interest rates fixed for a substantial portion of India’s $100.09 billion external borrowing by both public and private sector enterprises at the end of December 2011 are linked to LIBOR. The norms for these borrowings are set by RBI. No one, not even RBI, is sure about the impact of the reported LIBOR manipulation by participating foreign banks on India’s corporate sector.

Foreign banks in the country don’t operate as locally registered public institutions. They operate as wholly-owned branch establishments under a set of RBI guidelines, while their registered and operational headquarters are located outside. RBI knows little beyond what these branches statutorily reveal about their business and transactions to the domestic regulator through their local offices and establishments. Only when there are open violations, as detected in the case of Stanchart during the 1992-1993 securities scam, RBI finds it easy to investigate and demand information on specific transactions and deals and penalise the offender.

The economic reform has substantially relaxed banking and insurance regulations. India has become a favourite hunting ground for overseas banks, some of which have been looking for even local acquisitions. As on 30 April, this year, over 30 countries had their direct banking presence in India through a total number of 323 branches. In addition, there are a large number of foreign banks that maintain representative offices in India.

In contrast, India’s banking presence abroad is limited to only 125 branches, of which 98 are shared among Bank of Baroda, State Bank of India and Bank of India. So far, India had failed to utilise the ‘principle of reciprocity’ with several countries having banking operations in India mainly due to lack of business potential. RBI’s conservative approach to overseas operations by Indian banks has also stood in the way.

Indira Gandhi never trusted private banks, including foreign banks. During her first term as the prime minister, she got most large Indian private banks nationalised. Priority lending was introduced. Rupee transactions by foreign banks in India were highly restricted. In this regard, she often took advice from her trusted Harvard-educated industry minister, T A Pai, whose family founded Syndicate Bank that was to be nationalised as well. Given RBI’s limited capability in detecting and regulating bank frauds, including organised money laundering, and recent exposure of illegal operations of some of the foreign banks having large business presence in India, it is about time that the government seriously rethinks on the further banking and financial sector reforms without putting a strong and effective monitoring and regulatory mechanism in place. 
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