Cut & Thrust: Zero sum game

Sometimes, it is not worthwhile going down a dark alley. Bank privatisation is one such dank and unlit road, which everyone wants to avoid in India despite the porous banking system being manipulated by people repeatedly. On February 17, while addressing the Madras Management Association, chief economic adviser Arvind Subramanian decided to bell the cat: We need to recognise how much stress there is in the banking system. Bank of Baroda closed down its South Africa operations and now PNB is facing problems. Since then, Rotomac has blown up in our faces where seven PSBs have been caught napping and the amount involved is Rs 3,695 crore. Pertinently, an RBI panel while arguing for PSB privatisation had said earlier: “This (privatisation) would be a beneficial trade-off for the government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully.”

In his 2016 budget speech, Union finance minister Arun Jaitley said that the government has started the process of transformation of IDBI Bank and will look at bringing down government's stake in the bank below 51 per cent. It was like a whiff of fresh air. Three years later, on the eve of yet another budget speech and practically no movement forward on IDBI Bank's privatisation, the finance minister spoke again on the issue – the government decision on privatisation of IDBI Bank stands and it will be implemented at the right time.

High NPAs

Of course, IDBI Bank has pretty much haemorrhaged in the interregnum, for every Rs 100, Rs 24 are bad, with the bank having some of the highest gross NPAs amongst the PSB universe. “One of the objectives in supporting the non-PCA (Prompt Corrective Action) banks has been that these are the banks where robust lending has to take place so that they are able to support growth, lending and the economy itself,” he said while unveiling banking sector reforms. For the PCA banks, he said, the principle objective appears to be that they maintain their regulatory capital and it has been the criterion followed for IDBI. “The original decision (on privatisation of IDBI Bank) stands. It has not been reconsidered but there is always a time for implementing a decision,” he said. It was an unequivocal statement of intent. But there are too many conflicting signals and, of course, with the unions rattling the cage aggressively, it hasn’t happened.

In September 2016, Jaitley had reaffirmed – India is not ready for bank privatisation and the present characteristics of PSU banks will continue except for IDBI Bank. In fact, in October 2017, in a regulatory filing, IDBI Bank said its promoter, the Government of India, has increased its stake in the company to 77.79 per cent by acquiring 3.81 per cent shares through preferential allotment. The government earlier had 73.98 per cent stake in IDBI Bank. The government of India acquired 3.81 per cent shares carrying voting rights in the company due to preferential allotment of equity shares. IDBI top brass including, CMD Yogesh Agarwal, was arrested in January, 2017 for showing undue favours to Vijay Mallya’s Kingfisher Airlines.

Take PNB, which is completely owned by the Government of India and it comes with the sovereign guarantee of the same. Yes, the RBI has oversight and a supervisory role for these PSBs, but the government and the finance ministry call the shots. The central government owns 57.04 per cent. Government institution, Life Insurance Corporation of India, is the largest institutional investor in PNB with 13.93 per cent stake and it will hold on to its investment as it has full faith in the bank. LIC had increased its shareholding in PNB from 12.20 per cent to 13.93 per cent in the third quarter ended December 2017. “What happened at Punjab National Bank is an unfortunate event,” said V K Sharma, chairman, Life Insurance Corporation of India. “We will not reduce our stake,” he said.

Well, that is that. Domestic insurance companies hold 16.04 per cent as of December 31, 2017. In effect the government owns 87.01 per cent, while FPIs hold 12.56 per cent, so government has a garrote like grip on PNB and till these fetters remain, it cannot function efficiently or effectively. Which brings me back to asking a simple poser that if the government has such a vice-like grip on the bank – PNB – where is the question of blaming the central bank in such an abysmal failure?

Moreover, in a massive reshuffle, the same BJP government in March 2017 appointed heads of various public sector banks besides carrying out rejigs at PNB and Bank of India (BoI). PNB Managing Director (MD) Usha Ananthasubramanian was shifted to a relatively small Kolkata-based Allahabad Bank while head of BoI Melwyn Rego was moved to Syndicate Bank with immediate effect. The changes were made in these two public sector banks after a similar rejig at NPA-laden public sector lender IDBI Bank because of their non-performance in tackling non-performing assets (NPAs). In February last year, IDBI Bank head Kishor P Kharat was shifted to Indian Bank. Mahesh Kumar Jain of Indian Bank was shifted to IDBI Bank. Rajkiran Rai G, executive director of Oriental Bank of Commerce, was appointed MD and CEO of Union Bank of India for a period of three years. It is extendable up to May 2022 after review of his performance, the official statement said. Besides, R Subramaniakumar, executive director of Indian Overseas Bank, was elevated to MD and CEO.

As part of this exercise Sunil Mehta, executive director in Corporation Bank, was sent to the country’s second largest public sector bank PNB in place of Ananthasubramanian who was superseded. Executive director of Canara Bank Dinabandhu Mohapatra was promoted as MD and CEO of Bank of India. At the same time, ACC appointed RA Sankara Narayanan, executive director of BoI as MD and CEO of Vijaya Bank. Now we know that Nirav Modi and Mehul Choksi were cooking up this broth for seven long and uninterrupted years at PNB and the bulk of it happened in 2017-18, which means all security protocols, surveillance mechanisms and firewalls were breached with ease. Now one hears another overhaul is on the cards with PNB looking at a new team. Like Air India, governmental control is at the very kernel of the malaise and malfeasance and repeated contraventions and violations. Poorly paid PSB employees colluding with these sharks makes up for a big sad tale of woe.

Accommodative financing

Take the Mehul Choksi swindle. Accommodative financing (a flavour of the largesse given to Choksi is shown in the box) provided on the basis of Letters of Undertaking, letters of credit etc by banks has encouraged round tripping of diamonds by the principal players in the diamond and gold frat. Investigating agencies biggest headache is to cull out genuine trades from round tripped ones which are essentially meant for money laundering and exploiting the exchange rate arbitrage. The RBI had clamped down on platinum and gold arbitrated by the mandatory provision of value addition. However, such arbitrage was kept open for diamond importers and traders. Why such a loophole was kept open should now be the focus of CBI/ED/DRI investigation. Questions to RBI and the Department of Economic Affairs officials have to be addressed to understand the scale of the fraud. The game is all about round tripping not just of monies but diamonds. Rough diamonds are imported then cut and polished and exported. Diamonds are also used as collateral to raise money from banks and this is the accommodative financing provided by Indian public sector banks. The diamonds are then brought back into India using different novel smuggling techniques and then re-exported all over again with a mark up. Round tripping of the commodity and money laundering, both purposes are served with great precision and financed by PSBs.

To summarise, an expert Committee on Gems and Jewellery in 2016 had expressed concern over the absence of reliable turnover statistics in this sector and had opined that the domestic trade was grossly under-estimated to avoid both sales tax and income tax and had recommended sharing of the trading data with other tax authorities to detect instances of tax evasion. Given the multiple uses of the database, completeness of data was a prerequisite for doing any reliable analysis. Throwing into stark relief the systemic risks associated with the diamond trade, audit observed that the import/export data was incomplete and could not be used as the base data for any realistic analysis. Undervaluation and overvaluation of imports and exports of high unit value products are also liable to be used for financial outflows from the country due to trade mis-invoicing. The DGoV (the Directorate General of Valuation, a customs body that determines the prices of imports are correct, so that there are no undervalued goods to evade duty) database management system was not fully functional. C&AG’s Report No. 8 of 2015 stated it was not integrated with the EDI system of customs department or DGFT. The value of imports and exports for the total transactions captured in the DGoV database did not match with the trade figures reported by Commissionerate of Customs in Mumbai. DGoV had noticed some transactions of undervaluation and overvaluation, however, typically, ‘no valuation Alert/Guidelines was issued.

Data of the DGoV and the respective Commissionerates revealed that the data captured by National Import Database (NIDB)/Export Commodity Database (ECDB) was not complete. The variation in the export data ranged from 1.33 to 81 times the actual data provided by different Commissionerates for the period 2010-11 to 2013-14, similar variation was also observed on the import side. However, the import and export data pertaining to the PCCCC was not being captured in the database of DGoV, and import data of Gold Dore Bars are manually processed in PCCCC. The difference between the transaction wise valuation of trade between India and its exporting/importing partners, indicated that India ranks fourth in volume of illicit financial outflows in the world. This was almost $83 billion in 2013 and growing akin to the last ten years trend. It is around 4.5 per cent of India’s GDP (against global average of 4 per cent) and totally comprises outflows due to trade mis-invoicing. CBEC, in their reply (December 2015), stated that DGoV data is regularly updated and CBEC is willing to share the DGoV data on request basis. Finally, the reply of CBEC was not acceptable because during the audit it was observed that DGoV data was neither fully functional nor regularly updated. There is no existing mechanism/protocol of sharing of the data with other Government agencies.

All this translates into a simple theorem, the government should get out of banking, but in a nation where the psyche is so predicated towards socialist moorings, public service remains the cornerstone of why the public sector apparatus should continue to exist. And I don't begrudge that for a nation teeming with millions, public sector banks provide a yeoman service in the deepest recesses providing financial support to the last man standing. Micro finance institutions are adding their heft, but one cannot ignore State Bank of India's contribution to this country's appetite for thrift and in pump priming growth and development. Rural India or Bharat has been kept afloat by some of these banks. So, do the next best thing, merge and amalgamate them, create super structures and monoliths, so that they don't fail. Otherwise, they are ready for a fall. Because they are porous, penetrable and permeable; and their problems are endemic.

Sandeep Bamzai