PNB fraud: Why we need banking reforms

Reforms in the banking sector and tightening of processes would prevent a repeat of a fraud that is unparalleled in the Indian banking history

GN Bureau | February 16, 2018


#Punjab National Bank   #Nirav Modi   #Banking   #Banking Reforms   #PNB Scam  


Billionaire jeweller Nirav Modi, whose properties are being searched after Punjab National Bank reported a massive fraud of Rs 11,000 crore, is a good reason why banking reforms need to be urgently carried out.

Top Reserve Bank of India officials have been repeatedly stressing on the need to have reforms in the public sector banks which are currently weighed down by Non-Performing Assets.

Reserve Bank of India Governor Urjit Patel said on April 25 last year that the Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets.

“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks,” Patel said while delivering the Kotak Family Distinguished Lecture at Columbia University, reported The Hindu.

Patel said that “some banks can be merged, as a quid pro quo for timely government technical injection”.

Months later on December 7, Patel said that the recapitalisation package for public sector banks will not only be linked to their capital requirements, but also on their reforms initiatives to ensure the funds are not used to sow the seeds of next “boom and bust cycle of lending”.

The central bank is working with the government to finalise the recapitalisation plan, the livemint quoted him as saying.

Finance minister Arun Jaitley last year announced an unprecedented Rs2.11 trillion PSU bank recapitalisation plan to strengthen public sector banks. The plan includes recapitalisation bonds of Rs1.35 trillion.

In an important indication of what role the public sector banks should be playing, Viral Acharya, deputy governor RBI, said on April 28, 2017 that a bank should be something one can “bank” upon.

It is inspired by the real meaning behind banking upon something, a statement of credibility, of confidence, of trust – something that ideally a bank must earn over time by making prudent choices, he said.

Acharya explained that in essence, if an economic tsunami – like a massive house price crash or global economic collapse or underperformance in many industrial sectors – comes and hits the banking system, and it had chosen to remain heavily exposed to it by being on the shores, so that a large portion of its assets is deemed to be risky at once, then an unexpectedly large deposit withdrawal could be rather hard to meet for any bank.

“Worse, when this happens, if some depositors start being repaid by the bank, other depositors fear that bank liquidity is getting depleted and their savings might be at risk given the underlying assets are either not safe or not liquid enough in inter-bank markets. Now, these depositors may start demanding their deposits too. And a bank “run” starts. Fearing the asset-quality signal revealed by such a run at one bank, depositors could start running on other banks too, especially ones with similar assets and a full-fledged banking panic takes hold.”

When this happens, the entire banking system is at the risk of being disintermediated; payments and settlements of financial transactions can come to a standstill; banks have no capacity on balance-sheet to make new loans to new entrepreneurs, first-time home buyers and old families; the economic activity can come to a grinding halt. There are banks around, but no banking, the life-blood of the economy, to channel savings to productive uses and for job creation, he added.

 
 

Comments

 

Other News

ECI walks extra mile to reach out to elderly, PwD voters

In a path-breaking initiative, the Election Commission of India (ECI), for the first time in a Lok Sabha Election, has provided the facility of home voting for the elderly and Persons with Disabilities in the 2024 Lok Sabha elections. Voters above 85 years of age and Persons with Disabilities (PwDs) with 4

A fairly reasonable way to solve problems, personal and global

Reason to Be Happy: Why logical thinking is the key to a better life By Kaushik Basu Torva/Transworld, 224 pages

Is Nano-DAP a Catalyst for India’s Green Growth?

Nano Diammonium Phosphate, or Nano-DAP, is a revolutionary agricultural input that holds immense potential for transforming farming practices across varied agro-climatic zones in India. This innovative product is a nanoparticle-based formulation of diammonium phosphate, a widely used fertilizer in the agri

“Everyone, especially every woman, should’ve liberty of being themselves”

In February this year, yet another glass ceiling was broken, when Captain Shweta Singh became the first woman chief flight operations inspector (CFOI) at the Directorate General of Civil Aviation. Back then, in a social media post, Captain Singh had written: “The opportunity humbles me

India’s first home-grown gene therapy for cancer launched

President of India Droupadi Murmu launched India’s first home-grown gene therapy for cancer at IIT Bombay here on Thursday. Speaking on the occasion, the President said that the launch of India’s first gene therapy is a major breakthrough in our battle against cancer. As this lin

The Women of My Country: The Other Half?

1700 in 70: A Walk for a Cause By Gita Balakrishnan Rupa Publications, Rs 595, 208 pages At fifty-three, Git

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter