PNB: Banks Headed Towards Banning Loans Instead of Fighting Fraud

Nirav Modi and Mehul Choksi scandal takes a backseat after other scams have surfaced.

Sanjay Pugalia.

(Photo: The Quint) 

Video Editor: Ashutosh Bhardwaj

In the last week of February, news of Nirav Modi and Mehul Choksi cheating Punjab National Bank of over Rs 12,700 crore broke. So many scams have surfaced in a week that the Modi-Choksi scandal has taken a backseat.

One scam after the other has come to light – owner of Rotomac pens Vikram Kothari committed a fraud of Rs 3,600 crore in Bank of Baroda, Kanpur’s textile company owner MP Agarwal borrowed Rs 4,000 crore from 16 banks.

While the government was trying to defend itself, former finance minister P Chidambaram’s son, Karti, came under the scanner.

Amidst all this, many issues are being ignored.

So, here are the questions which we need to ask about the Indian banking system:

How Much Money Is Trapped?

The letters of understanding (LoU), or bank guarantee, has only been revealed in Modi and Choksi’s case in which Punjab National Bank has lost Rs 12,700 crore. But, it looks like the amount will go up to Rs 20,000 crore.

This is just a matter of one customer of one branch of one particular bank. It is obvious that the PNB and other banks would have given LoUs to more people. No one knows how much has been raised through LoUs from Indian banks.

What is the Account of Letters of Understanding From Other Govt Banks?

Apart from this, banks have given out bank guarantee, letters of credit, term loans, and working capital to diamond or jewellery traders, which are risky industries. Nobody has any idea how much money the government banks have lost to these risky sectors. The government or the RBI must answer.

Apart from this, there are many other questions –

How much collateral do the bank have against these risky loans?

Were loans given out against half collateral?

Why is RBI silent on all this?

Banking regulators have been silent on all the scams. The Ministry of Finance says that new surveillance systems are being implemented in the next 15 days for loans above Rs 50 crore.

The RBI should answer these questions, and the central bank’s silence is raising many questions.

The position of Deputy Governor at the RBI has been vacant for the last seven months. Their work is to monitor banks. The RBI is now trying to fill that post after the Modi-Choksi case.

These type of scams will only stop when the monitoring agencies work more efficiently. The SEBI came up with an idea to trap these companies. The idea was that the banks can disclose the names of licensed companies to SEBI if they are unable to recover loans, also disclosing the amount that they are unable to recover.

This was supposed to be implemented on 1 October 2017, but it was withdrawn a day before that.

PSUs have known about the defaulters list for a long time now. They should have approached the court sooner. But after the PNB scam, the banks are filing FIRs against the scamsters when they could have taken actions against them earlier.

The side-effect of all this is that the banks will soon stop lending. Banks are handing thousands of default cases to the (National Company Law Tribunal) NCLT instead of recovering them. This will affect SMEs and small traders, as they borrow from banks for their working capital.

Majority of these borrowers are wilful defaulters. Despite all this, no action has been taken against the top management of these banks. The CBI has interrogated them just for investigation purposes. The government is not taking any action and is only trying to dodge it. In fact, it is putting all the blame on the RBI.

(This story was originally published on Quint Hindi)

Translation: Srishti Tyagi