The regulator must step up

Without mincing his words, Minister of State for Finance Shiv Pratap Shukla said in a written answer to a query in the Lok Sabha on April 6 that following the introduction of the AQR in 2015 and the transparent recognition of restructured loans as NPAs, gross NPAs of PSBs swelled by a hefty 4,54,000 crore rupees between March 2015 and June 2017. PSBs, he said, accordingly made upfront and due provisions for the expected loss on such stressed loans, of a total amount of Rs 3,79,080 crore between March 2014 and June 2017, which was well-nigh twice the provision of Rs 1,96,937 crore made in the preceding decade! It is pellucid that the amounts written off in the fiscal year ending in March 2017 and the preceding few years are substantially on the account of such stressed accounts belonging to earlier years, which have been fully provisioned following the AQR.

It is further clarified by the way of edification to those who might frown upon taxpayers' money being doled out sans any qualms, that "writing-off of non-performing assets is a regular exercise conducted by banks to clean-up their balance sheet and achieve taxation efficiency." Besides, it is claimed elliptically that writing off loans is done for "tax benefit and capital optimisation". Lest the finer feelings of the harassed taxpayers are hurt, it is added by way of tame reassurance that "borrowers of such written off loans continue to be liable for repayment." It is added that the recovery of dues supervenes the ongoing basis under legal mechanisms, which include the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) and Debt Recovery Tribunals (DRTs). More fittingly, the Insolvency and Bankruptcy Code (IBC) which came into effect last year, is the most significant and landmark legislation as it would put many large borrowers, including corporate firms and smaller enterprises, to undergo liquidation under the IBC so that the proceeds could be part-used to pay back banks and make recovery – not a mockery as has been the case hitherto! Though a write-off may seem apparently not beneficial to borrowers, the long delay and the run-down of assets meant that the recovery is going to be paltry and the haircuts to be endured by the lending banks too awkward to escape the event of a real loss of face!

It is germane to note that Minister of State for Finance Pratap Shukla admitted in the Rajya Sabha that during the last five financial years from April 1, 2013, till February 22, 2018, there were 13,643 cases of bank frauds, involving an aggregate sum of Rs 52,717 crore, based on RBI data.

In response to another question subsequently, the minister said that as per RBI inputs, the Punjab National Bank (PNB) reported the fraudulent issue of Letters of Undertakings/Foreign Letters of Credit (FLCs) for payments of import bills, amounting to Rs 12,967.86 crore, to the RBI through its Fraud Monitoring Reporting System. This was the case of a notorious maverick diamond merchant Nirav Modi, who took the facile recourse to LoUs/FLCs to defraud the bank substantially and solidly, as he flew away to a safe haven before his criminality could be unearthed! It was subsequently established that the lack of integration between the CBS (Core Banking Solution) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) allowed the PNB officials to cheat and be in league with the firm that perfected the art of defrauding the bank! In the wake of the PNB scam, the government had to abolish the due trading mechanism – LoUs for exporters importing inputs/intermediates, causing every other manufacturer-exporter avoidable anxiety and perpetual trouble.

No sooner was the dust kicked by the PNB scam settled that another one had erupted in the form of a conflict of interest of the private bank ICICI's CEO Chandra Kochhar, for a loan given to Videocon from whose promoter an immediate family member of Kochhar may have gained! In both cases, involving a PSB and a private sector bank, the system controller, the RBI, could not spot the shady operations right in time before they were festered enough to embarrass the whole nation. What makes one aghast is that ICICI is assigned by RBI as a Systemically Important Bank (SIB), which by its very appellation meant that if the bank gets into rough weather, the whole financial edifice of the nation could be in peril. This naturally puts the onus on RBI to be extra vigilant in its supervisory function of the SIBs. Did not the supervisor get access to its own channels to ensure that the top echelons in the SIBs do not have a conflict of interest or feather their own nest using their exalted status in the institution they serve? This is also analogous to the anomalous laxity in the PNB case where the supervisor RBI was supine enough to not be alert of the absence of due and crucial communication between the CBS and the SWIFT system that let the errant elements within the bank collude with a greedy customer to hoodwink the bank!

RBI could not merely be content with stating that "compliance with RBI's instructions is the bank's responsibility and the Compliance Officer in the bank monitors the same". It is trusting your subject too much hoping that they would all be above reproach, but when the chips are down with a few bad inside elements playing into the hands of a master cheat client, things get hotter for both the bank as also the regulator -- as this case so glaringly and gallingly demonstrates to the public who have put their hard-earned money by way of deposits into these universal banks!

The sole and whole regulator of the banking sector must perforce have to crack the whip to bring an iota of seriousness in the conduct of the affairs of the PSBs and also the emerging private banks. RBI has delivered well on the inflation-targeting core agenda to keep its image glimmering albeit the diatribe by critics who said its inflation forecasting leaves a lot to be desired. It is time the apex bank focused itself more on its regulatory role in right earnest so that the affairs of the banking industry do not turn scurrilous and risk compromising the rights of genuine stakeholders!