Title: Can banking recover?
(We need stricter adherence to sound banking rules and more transparency from public and private players)
• The bank frauds involving Punjab National Bank (PNB) and the companies associated with businessmen Nirav Modi and Mehul Choksi as well as the Rotomac case couldn’t have come at a worse time.
• Non-performing assets (less politely known as loans that are not going to be repaid), will touch nearly ₹10 lakh crore by March this year.
Failure at many levels
This failure has occurred at many levels.
• At the level of the bank, it is impossible to believe that only a handful of employees (the current fall guys) have been implicated. Senior management and auditors did not track these problematic transactions for years.
• The Reserve Bank of India (RBI) did not monitor banks properly and created opacity with new financial instruments.
• The Finance Ministry failed in its oversight and regulation.
• And successive Central governments, including the present one, did and have not done anything to address the obvious problems that were festering, and made them even worse
Using LoUs
• The PNB scam relied on the existence of an unusual financial instrument, the letter of undertaking (LoU).
• This is a bank guarantee that enables a bank’s customer to raise short-term credit from another Indian bank’s foreign branch.
• It has to be another Indian bank, because the LoU as a form of underwriting other borrowing does not exist in other countries and is not even recognised by foreign banks.
• It was created by the RBI as an additional incentive to importers who could then avail of cheaper credit abroad, even though import credits already exist.
• Commercial bank lending is massively skewed: according to the RBI, in March 2016, 11,643 borrowers accounted for 38% of all bank loans; large corporate borrowers had the overwhelming share (84%) of bad loans. Just 12 large outstanding NPA accounted for as much as ₹250,000 crore.
• Finance is one of the many ways in which concessions and advantages are distributed.
• Some favoured companies are not declared wilful defaulters even when the government’s own investigating agencies find that they are diverting funds.
• Those declared as wilful defaulters are neither punished nor prevented from leaving the country. In fact their names are not even made public, so they can continue to access loans from other banks.
Privatisation no answer
• The current mess has also become an excuse to demand the privatisation of state-held banks.
• This completely misses the point since privatisation would actually make things much worse for Indian banking.
• The key issue is one of poor regulation, and not ownership.
• Poorly regulated private banks are even more prone to scams and failure.
• In India, in the decade before the nationalisation of banks in 1969, there was an average of more than 35 private bank failures every year.
So why has banking regulation in India failed to this extent?
• The RBI may have been too occupied in counting old currency notes and dealing with the other damaging consequences of demonetisation to pay enough attention to its real job — of bank regulation.
• But more significantly, this government, like the previous one, has created incentives for all banks to privilege large high-profile corporate borrowers and be relatively lax on their repayment in the mistaken belief that this would encourage sustained income growth.
Conclusion
• Recovering from this will require stricter adherence to sound banking rules and more transparency and accountability from both public and private players. But most of all, these would apply to the regulators themselves and the government that frames all this.
Vocabulary words:
Adherence (noun) = Commitment to someone (अनुपालन)
Reel (verb) = Feel shocked (भयभीत करना)
Disbursal (noun) = Amounts paid for goods and services that may be currently tax deductible
Tip of the iceberg (idiom) = Only a hint or suggestion
Sheer (adj) = Complete (बिलकुल)
Diligence (noun) = Careful and persistent work (कर्मठता)
Bode (verb) = Predict, foretell (भविष्य-कथन)
Implicate (verb) = Show someone to be involved in a crime (अपराध में फंसना)
Opacity (noun) = The quality of lacking transparency (अस्पष्टता)
Fester (verb) = Become worse or more intense (सड़ना)
Contingent (adj) = Unexpected, unpredicted (आकस्मिक)
Siphon off (phrasal verb) = Convey, draw off (बेइमानी से निकालना)
Plague (noun) = Calamity (विपत्ति)
Skew (verb) = Suddenly change direction (हटना)
Crony (friend) = A close friend
Exploit (verb) = Utilize (लाभ उठाना)
Prone (adj) = Vulnerable, inclined (प्रवृत्त)
