A jeweler, a fraud and the role of Indian public banks
Once credited with fueling India’s rapid growth, the state banking model is now under the knife.
Nirav Modi, a famous Indian jeweler at the center of a multibillion-dollar fraud investigation, may be extradited to India, a UK court said last week.
It is a case that has shaken the Indian banking sector. Nirav – no connection to Prime Minister Narendra Modi – has been detained in Britain since March 2019 as part of an investigation into his company, which in its heyday had diamond shops on Madison Avenue in New York and Old Bond Street in London.
Using loopholes in the audit system of the Punjab National Bank (PNB), one of India’s largest, Nirav was able to secure trade finance loans of around $ 2 billion – money that he did not return.
Never before has such massive fraud hit the banks of the world’s fifth-largest economy, which for decades has relied on public sector banks (PSBs) to fuel its growth.
The case has brought to light PSBs, which are overflowing with non-performing assets (NPAs), loans that are unlikely to be repaid. Over the past 12 years, the Indian government has injected $ 52 billion in taxpayer money to keep PSBs afloat.
“The public sector financial industry has played a stellar role – call it a nation-building role,” said Tamal Bandyopadhyay, financial journalist and author of Pandemonium: the great Indian banking tragedy.
“It’s been about 51 years since banks were nationalized and they have served the goal of financial inclusion, the goal of bringing the bank to the hinterland and attracting more people into the banking network. “, did he declare. TRT World.
Once a savior, now a burden
Nirav Modi has spent lavishly on events showcasing his diamond coins. Bollywood star Priyanka Chopra and model Rosie Huntington-Whiteley have appeared in commercials for her rings and necklaces.
And this venture, luxury and glamor, was partly funded by the Brady House branch of PNB in Mumbai.
It was from there that Gokulnath Shetty, a mid-level PNB employee, who only received one promotion in his 36-year banking career, helped Nirav borrow 1.77 billion in trade finance loans for seven years from 2011.
A dozen PNB officials face charges ranging from active participation to fraud to negligence. The fact that such a large fraud went undetected embarrassed not only senior PNB officials, but also those of the Reserve Bank of India and the Indian Ministry of Finance, which oversees the PSBs.
But high-profile cases of bad governance like the one involving billionaire Vijay Mallya, owner of Kingfisher Airlines, are not what has tainted these banks’ balance sheets.
“These are not the rule, these are exceptions,” Bandyopadhyay said of governance issues in the PSBs.
Unlike private banks, which are driven by profit, New Delhi has used public sector creditors to pursue development goals such as ensuring that people in rural areas have banking services and that small businesses can get loans.
Public sector banks grew rapidly after the late Prime Minister Indira Gandhi of the opposition Congress Party nationalized the banking sector in 1969.
Since then, banking services, including loans to small businesses, have grown rapidly as public banks have opened thousands of branches and mobilized household deposits.
“After nationalization, the scope and reach of India’s banking sector expanded at a rate perhaps unmatched by any other country. The Indian bank has been remarkably successful in achieving mass participation, ”wrote Abhijit Banerjee, MIT economist and Nobel Prize winner, in an article.
In Pakistan, India’s immediate neighbor, businessmen often point out that Islamabad has not been able to keep pace with industrialization because risk-averse private banks do not support large-scale projects. under.
In India, PSBs, in which the government holds the majority stake, account for two-thirds of all outstanding loans. Most of the banking assets in Pakistan are concentrated in the hands of private lenders.
What didn’t go well?
Successive Indian governments have used the PSBs as a political instrument to fund populist loan programs, which have not necessarily been repaid, Bandyopadhyay said.
“Public sector banks are under pressure to make certain government programs work. In 2015, the BJP (Modi’s Bharatiya Janata Party) launched the world’s largest financial inclusion campaign. You will find that the public sector banks take the lion’s share.
This program known as Pradhan Mantri Mudra Yojna resulted in reservation losses for PSBs as people did not pay interest on time.
Problems with most Indian banks, especially PSBs, also stem from a change in lending models – PSBs, which used to serve the working capital needs of businesses, were pushed to grant project finance loans from the late 1990s, Bandyopadhyay said.
A factory or power plant requires a project finance loan, which is repaid over a period of several years. Not all PSB officials had expertise in this area, leaving them at the mercy of borrowing companies to tell them if a project was economically viable.
“They (PSB) haven’t developed the expertise to assess these projects and manage the risks,” Bandyopadhyay said.
The PSBs were also harmed for reasons beyond their control. For example, companies struggled to get approval for their projects during the second term of former Prime Minister Manmohan Singh, which ran from 2009 to 2014.
Often, projects – in which PSBs have been heavily invested – have been blocked due to legal issues or delays in obtaining authorization from the Ministry of the Environment.
A way forward
For years, PSBs have underreported the status of their loan portfolios and hid the exact number of defaulted borrowers.
That started to change in 2015 when RBI finally put their foot down, telling PSBs to speak frankly about their NPAs. When the actual numbers were made public, it sounded the alarm bells.
“Before the first asset quality review of its kind, NPAs were very low. But after this review, the NPA stack has grown significantly. In some cases, they have affected almost a third of the total assets of a few banks, ”Bandyopadhyay said.
Such a scenario essentially indicated that a third of borrowers would likely never repay the loans, leaving banks with financial losses.
NPAs have also increased funding requirements, forcing banks to put money aside to cover expected losses. The government, which is the ultimate owner of the PSBs, has been forced to pump billions of dollars to keep them from sinking.
“The government would have received a much higher return if it had invested the same capital in private banks instead of public sector banks,” Bandyopadhyay said.
New Delhi is now trying to overhaul the PSBs. It has already merged many state-owned banks, reducing their number from 27 to 12. Some of the banks have been marked for privatization.
Private banks, which are not bound by the bureaucracy that makes it difficult for PSBs to recruit talent, have increasingly relied on technology to capture a larger share of the market.
“I think public sector banks have lived their lives,” Bandyopadhyay said.
“This is probably no longer the time to dwell on nostalgia. It’s time to ask if you allow public sector banks to keep the old format or change them over time.
Source: TRT World