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Dirty Banking; The Naked Dance of Indian Banks Asuras

Yesterday, 8th April 2018, PNB Chief tried to assuage investor fears by saying that it will be out of the Nirav Modi fraud in 6 months. My immediate question is “so who’s next?Earlier we had argued why Nirav Modi in Indian banking is synonymous with ‘John Doe’, just a placeholder for so many rich unscrupulous individuals/ corporates who are ready to game the Indian banking system taking advantage of compromised governance process and loopholes. Just to make matters worse, a responsible and high-profile citizen of India, Mr. Ashish Chauhan, CEO BSE tries to make light of the entire fraud. He calls it ‘fearmongering’ and tries to trivialize the fraud amount by comparing it to the banking ecosystem interest of just 3 days! Try to talk that out to general citizens of the country, many of whom does not get food or home guaranteed in their life!!! Coming back to Mr. Sunil Mehta, PNB CEO, he tried further to address concerns by talking about general process & technology initiatives that the bank is undertaking to avoid recurrence. Believe us, he just wants to see his tenure to get over before the next mega scam hits the bank! RIP (Retire in Peace)

A $2 billion fraud and has any senior leadership head rolled till date? NONE. The MD is in denial mode, it is just a one branch issue! If no accountability exists at the top echelons then expect no real change to happen! Any major fish arrested? None till date! Any potential penalization? Surely…. How much for the bank or its big bosses’ bonuses is yet to be ascertained but for ordinary tax payers and bank’s customers? Huge! The reason is simple.

  1. Bank’s share has taken a huge beating so investors lost tons of money. Were they responsible for the fraud? NO
  2. Bank’s profitability will be hit so it will try & adjust the same by raising interest rates & also the spread between the rates (NIM). Mr. Ashish Chauhan alludes to this fact as well when he speaks off “This kind of scams also give (banks) enough ammunition to take more money out of you…”. Were the bank ordinary customers responsible for this fraud? NO
  3. GoI is rethinking of the PSU bank recapitalization amount. The 13000 cr fraud nearly wipes out PNB’s recapitalization pipeline (5000 cr from GoI and 5000 cr it raised through QIP in Dec 2017). Refer to our earlier article on this. Where will the GoI get the additional amount? From tax payers only! Were these tax payers responsible for this fraud? NO

So, to summarize, people who are not even remotely connected to this fraud are potentially going to fund the banks recovery from the fraud while the one those who should be accountable at the very top, may get off with light reprimand!

The malaise in the banking ecosystem goes much beyond the PNB fraud.

  1. Today we are hearing about a potential round tipping fraud of around 3,250 crore that was loaned by ICICI bank to Videocon. Smt. Chanda Kochhar family, husband and brother in law, are being questioned by CBI and the later has also registered a PE against her husband. Read more here.
  2. Axis bank asking its CIO & President to resign because of allegations of irregularities and inappropriate deals in the technology department he was heading. Read more here.
  3. RBI asking Axis bank to reassess the reappointment of its CEO, Smt. Shikha Sharma, over the bad loan mess it is in.
  4. Winsome diamonds, Rotomac case, Vijay Mallya, Nilesh Parekh and many more. Read more here.

The challenge is that several large private sector banks, as shared above, are also under scanner for compromised governance issues and thus putting a huge dent on those in the government and elsewhere, propagating privatization of PSU banks. Considering privatization as the panacea for bad governance will be the biggest disaster that this government can make! Obviously, privatization can ease the pressure on GoI budget deficits as it will no longer be responsible for recapitalization. That logic may juts hold true!

What we said above are tip of icebergs if we scan a few more on our lists and which have attracted RBI penalties as well. The breadth & depth seems to be overarching the full spectrum of the banking ecosystem. Most of these below fines were triggered by frauds which happened at each of these banks and the RBI enquiry post the same! In all these cases, the concerned banks were found flouting laws/ non-compliant to RBI regulations. Ironical that the RBI Governor is expecting “Devas” when his own data is bringing more & more “Asuras” to the front.

These penalties are the least deterrent for such banks. Without a strong system of accountability that can not only ascertain the key people but can also provide exemplary punishment to those responsible for enacting or perpetuating the frauds/ non-compliance, no real change will happen.

Another challenge has been the general knee jerk reactions and short sightedness in approach. For e.g.

  1. Blanket revoking of LOU
  2. Sudden rotation of PSU bank’s employees en masse just after the PNB fraud happened
  3. Discussions on diluting stressed assets norms

Today, all attention is towards reflecting better profitability for a few quarters, make the economy look upbeat and all that is essential when elections are not far off!

But what can work wonders for the banking ecosystem from a long term are:

  1. Transparency in the “Write-off’s”! and may be making a few details public, creating a registry open for scrutiny. This can’t become a bucket of willful defaulters leveraging bad corporate governance.
  2. Giving teeth to the BBB (Banking Bureau Board) so that it can work towards ensuring strong governance at banks
  3. Overhaul of RBI audits. Recurrence of such huge frauds also points to some lacunae in the supervisory system that RBI has. This will mean lot of uncomfortable questions and internal probing!
  4. Redefining KPI/ incentive structure for the banks. It says that incentive drives a man’s behavior or even an organization culture! For last few years, consulting companies have pushed banks to look for revenue growth by making branches as sales center, setting stiff sales & cross sales targets and improve profitability by optimizing cost to income, manpower. Technology, process & cultural empowerment of bank employees have been slower to come compared with the speed at which the banking model was changing, resulting into people looking only at quantity and not quality, be it new savings account enrollment or sanctioning of new loans. All that garbage that has got pushed in without much thought are now getting rotten! Its smelling bad but our leadership is only busy procuring more air fresheners rather than trying to correct things at the input
  5. Lastly, not the least, greed has to be contained and punished AND that is not going to get done by sermons of Mr. Urjit Patel (requesting industry bodies & leaders to be on side of Deva’s) but by prompt and exemplary action on those who are found to be at the root of the rot with higher the role, stronger the punishment.

Unfortunately, none of these will happen! The hand of greed, corruption, power and politics are strongly intertwined. Today, when the economy resilience is under threat, many sermons and a few knee jerk reactions will follow. With time, common people memory will also fade till the next big fraud comes AND the economy may also improve and thus taking away the focus! It will be back to square one!

 

Source: Mentioned above as a clickable link, wherever applicable

 

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