Lessons from bank scam
Hundreds of thousands of depositors have been left in the lurch by the scam that surfaced at the Punjab & Maharashtra Co-operative Bank (PMCB). The bank, which had Rs 11,617 crore in deposits as on March 31, 2019, had violated Reserve Bank of India (RBI) norms to lend heavily to one client-real-estate firm Housing Development and Infrastructure Limited (HDIL), which itself is facing bankruptcy proceedings. The RBI has imposed lending restrictions on PMCB, at Rs 10,000 per customer for six months, creating panic among depositors. Distraught authorities have now booked the former chiefs of the bank and the promoters of HDIL for cheating. Lookout notices have also been issued against them. But that does nothing to assure PMCB depositors that their money is safe. Here are some of the lessons to be learnt from this scam:
Rid banks of the politician-banker-corporate nexus
This malaise has been hurting Indian banking for long. Politicians are all the more willing to use banks-in PMCB's case a large cooperative bank-where they wield immense clout in order to please corporate honchos and take favours in return. Public sector banks have run into bad loans worth over Rs 8 lakh crore, and much of this can be attributed to this nexus. While greater public scrutiny of these banks has made bankers more cautious, cooperative banks remain largely out of public eye as most of them are unlisted.
India had 1,551 urban cooperative banks in 2018, as per RBI data, down from 1,926 in 2004, pointing to the high risk of failure of these banks. Such banks often start on a small capital base, as low as Rs 25 lakh, making them all the more vulnerable. In PMCB's case, it had an exposure of over Rs 6,500 crore to HDIL, four times the mandatory cap fixed by RBI, amounting to over 70 per cent of the bank's entire assets.
Address lack of corporate governance While corporate governance is a serious issue in private banks, it often goes neglected in the cooperative banking sector. How does one explain that former PMCB chairman Waryam Singh also held a stake of 1.9 per cent in HDIL till September 2017 and was a non-executive director of the real-estate company in 2005-15, the time the bank was sanctioning loans to HDIL?
Make watchdogs more accountable
The PMCB crisis shows how the watchdogs-the bank's auditors, the RBI and the government-were caught napping. The fraudsters managed to cover up their tracks well, reportedly using at least 21,049 dummy accounts to hide accumulated non-performing assets. The RBI cannot absolve itself of the responsibility to keep a proper check on banks. While it did flag irregularities in certain private banks, a far stringent watch is required. Maybe the mandatory annual inspection is not enough. Otherwise, how do such large frauds escape its radar? Similar questions were raised in the fraud allegedly perpetrated by diamantaires Nirav Modi and Mehul Choksi at the Punjab National Bank (PNB), where bank guarantees were raised without collaterals to evergreen their loans.
Address depositors' woes quickly
Every time a bank scam erupts, there is public outcry, investigators spring into action, a few are booked and some even jailed. But the rest of the process is extremely slow. Depositors normally have to wait long before they are able to get their money back. In the case of the Madhavpura Mercentile Cooperative Bank scam in 2001, some 45,000 depositors had to wait till last year to get an assurance that they will get their money back. Implement RBI panel recommendations In 2015, an RBI panel under R. Gandhi, former deputy governor at the central bank, had proposed several reforms for the cooperative banking sector, which included creating an umbrella organisation for cooperative banks and instituting a board of management. A board of management, over and above the board of directors, would bring the bank under greater RBI control, it is felt. Other suggestions are amendment of the Banking Regulation Act to give more powers to the RBI over cooperative banks, empowering the RBI to wind up and liquidate banks independent of other regulators under the cooperative societies' laws, and allowing urban cooperative banks to be converted into small finance banks under the RBI's supervision.
There is no end to scams in the Indian financial space, where, in a matter of years, public sector banks, private banks, non-banking financial companies, and now cooperative banks have been caught on the wrong foot. The inherent follies in their operations need to be addressed effectively if the public has to continue placing its trust in the banking system.