The government’s two-week deadline to state-run banks to identify risks to fraud is at best a knee jerk reaction to the recent cases involving the Punjab National Bank and others. Loan portfolios of Rs 50 crore and above would be huge in several banks and state-run banks do not have the wherewithal to collate the information relating to borrowers in this category. Even if they are able to list out the borrowers, risk analysis is a tricky area where banks have very few expert hands. The entire exercise is not only time consuming but involves costs to expert evaluation given that most large business borrowers need to be profiled based on sector-specific developments, economic matrix which would then have to be correlated to performance.
Given that the government has had no clue to the virtual daylight robbery of small depositors’ money worth $2 billion by a couple of diamond merchants out to abuse the system, the latest directive hardly makes any sense. Why count the losses after the house has been burnt down? This is the moot question finance minister Arun Jaitley and his team has to ask themselves. Barring a few suspensions, aggressive statements from people at the highest levels that no effort would be spared to ‘hunt down the culprits’, little of note has happened so far.
Hence, there is reason to believe that the latest exercise may be futile. Bankers in India are not always trained to undertake cost-benefit-risk analysis of their loans portfolio. Even if the government had conviction and commitment to act, how do bankers identify the intent of corporate borrowers to default wilfully by abusing the system? It is possible that the latest action will turn out to be counter-productive. The banking system cannot be run by instilling fear. Besides, there is the danger of branding all prospective corporate borrowers as potential fraudsters. Even if Rs two lakh crore is considered ‘wilful default’, it does not justify punishing borrowers who would have availed the other Rs 800,000 crore.
There is no denying that the systems in banks — software and hardware — have to be fine tuned to plug technology linked loopholes used by fraudsters. Secondly, no one disputes the fact that top managements in banks would derive power and autonomy only by taking responsibility for their actions. Thirdly, sacking low-paid deputy managers may not serve the purpose as in the case of Punjab National Bank episode.
It is pertinent to ask why independent directors on boards of different banks have not been taken to task. If they have not acted with responsibility towards small investors and depositors, they have no business to continue in their positions.
Holding press conferences to pointing fingers at regulators may serve a very limited purpose. One has to get into the thick of things and overhaul the system, bring RBI, internal and external auditors to scrutiny. While pointing to their lapses, can the political leadership of the day escape culpability? Should heads not roll if eyes were firmly shut during the last four years?
Whipping up a fear psychosis across the economic system may not work to one’s political advantage either. Of course, the government may be partly right in thinking that the signal being sent out to ordinary people is that it is acting against big fraudsters. However, this messaging may have very a short-term impact on voters ahead of the next general elections. Taking pointed and specific action based on intelligence inputs quietly is the only way forward to preserve the integrity of banking system – both state run and private sector institutions. There is little to gain from running amuck.