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LATEST NEWS UPDATES | Can banking recover? -Jayati Ghosh

Can banking recover? -Jayati Ghosh

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published Published on Feb 26, 2018   modified Modified on Feb 26, 2018
-The Hindu

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. The Indian banking system is already reeling under the pressure of growing NPAs, or non-performing assets (less politely known as loans that are not going to be repaid), which will touch nearly ?10 lakh crore by March this year. This does not include the ?6 lakh crore already written-off. This has already caused a slowdown in disbursal of bank credit, in turn affecting productive investment.

Failure at many levels

What has been revealed so far could be only the tip of the iceberg. The sheer ease with which fraudulent practices have been carried out and the length of time over which they continued suggest that the rot is much deeper. Other banks could have provided large loans without due diligence, which other companies then received without intent to repay; this means that many more loans gone bad could soon surface.

These revelations cannot bode well for the ruling party or for a Prime Minister who had promised to be the nation’s “chowkidar” to prevent any such loot. But let us step away from the politics. It is now clear that the scams are fundamentally and overwhelmingly a failure of regulation.

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.

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The Hindu, 26 February, 2018, http://www.thehindu.com/opinion/lead/can-banking-recover/article22852646.ece?homepage=true


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