On Monday, it was a pity to watch both the Congress and BJP engaging in mud-slinging in Parliament over the multi-crore PNB (Punjab National Bank) scam — a problem that cannot really be attributed to any one political party. It symptomises a deeper structural problem in the banking system, where all political regimes are equally responsible. The reasons for this problem are quite well known, but solutions and the political will to act are missing. Thus, passing the buck in Parliament was nothing but a political gimmick, far from a constructive approach to address the problem.
Union railway minister Piyush Goyal blamed the Congress and accused it of misleading the nation over the PNB fraud case saying that Nirav Modi and Mehul Choksi are connected to the Congress and the problem began during the UPA days. From the other side, Congress leader Anand Sharma wanted answers from the Narendra Modi government on the bank fraud as it happened “right under his watch." It is most likely that the remaining days of the Budget session will continue to see political blame games and mud-slinging while important questions will be missed.
These Members of Parliament (MPs) should think about how the PNB scam took place. To begin with, it isn’t unique to PNB. The scam exposed the painfully weak risk management framework long followed by Indian banks and the inability of the regulator to identify a serious flaw in the system for seven long years, despite having all its powers and representatives on bank boards. Only after the scam did the Reserve Bank of India (RBI) ask banks to mandatorily link SWIFT software to the Core Banking System (CBS) and closely monitor high-value exposures. This is only one aspect where the RBI couldn’t act.
As former RBI deputy governor KC Chakrabarty said in a recent interview with Firstpost, there is zero risk management capacity with Indian banks. The many different audits in the bank failed to detect a fraud of this magnitude. The management-level monitoring in banks is so poor that certain employees, at an important branch of the country’s second largest bank by assets, could fool the top management for a very long period.
Nirav Modi cleverly used and exploited the flaws in the system and orchestrated the fraud, ultimately exposing the weak risk management framework of banks. How can anyone refer to this as a scam created by either the Congress or BJP? Beyond helping to reap political benefits, the political blame game cannot take the debate far.
What probably should be debated at least now is whether the nation is ready to pursue the course of privatisation of state-run banks. By now, state-run banks have conclusively proved their inability to survive on their own and keep up to the minimum standards of corporate governance and management efficiency.
The biggest takeaway from the PNB scam is that government banks (private and foreign banks appear to be relatively more accountable to their shareholders) have not learnt the lessons from past instances of frauds and loan default/fund diversion cases. They repeat the same mistakes, not once but continuously. This is reason enough to overhaul the current ownership, operational structure of public sector banks (PSBs), particularly since every time the government recapitalises these banks hit by NPAs and frauds, it is the taxpayers’ money that is wasted. These poorly-run institutions do not deserve another chance. It would have been far better if Parliament came to the discussion table to ponder over long-term solutions to the problem, taking PNB as an important learning episode.
The long-stuck idea of privatising PSBs can be debated at this stage. These banks, mostly busy in rolling out government schemes, directed lending requirements and public infrastructure projects, soon forgot the golden rules of the game, mainly creditworthiness of the borrower, strict monitoring of end-use and cost-effective, efficient style of operation that their competitors adapted quickly. Currently, India has 21 state-run banks. So many government banks in state control are quite unnecessary in an ambitious economy that is thirsty for foreign investments. Hence, this is the time to privatise most of them.
There is merit in thinking in this direction now not just because of the PNB scam but looking at the larger ill-health of PSU banks. At least five more PSU banks are facing RBI’s prompt corrective action plan on account of rising NPAs and financial irregularities. Almost 90 percent of bank NPAs are on the books of PSU banks. Governments, under both the UPA and NDA, have time and again proved that as owners of these institutions, they have failed to get the act right in PSBs. At least now, the warring political parties should come together and think of radical reforms to save India’s state-run banks. The political blame game over the PNB scam in Parliament can’t take the debate far.
Updated Date: Mar 05, 2018 15:39 PM