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

Expanding Eureka!

Abright yellow van with figures of children playing with a whirligig, a Newton’s cradle, a magnetic compass rolls into the Government Higher Primary School in Kittaganahalli, on the outskirts of Bengaluru. Students in the playground leave what they are doing and mill about it in excitement. For they

The spark in the classroom

Not many children dream of starting an idyllic school of their own when they grow up. But Ramji Raghavan, founder of the Agastya International Foundation – which fosters the creative learning of science in stude

Trafficking survivors’ votes don’t count

While the entire nation is agog with political grapevine, political parties are weighing on all options to lure voters by touching upon issues that impact their lives. Several parties, including the BJP and the Congress have released their manifestos while many are about to join the bandwagon. The

“I have a bigger reason and motivation to join politics”

Urmila Matondkar joined the Congress party and within just two months into politics, the actor is already surrounded by controversies – from being accused of making anti-Hindu comments to inappropriate poll campaigning. Fielded against BJP’s Gopal Shetty in the Mumbai North constituency, Ma

Campaign trail with BJP’s Manoj Kotak

Dressed in white shirt and pants, three time Bhartiya Janta Party (BJP) corporator Manoj Kotak is now contesting from Mumbai north-east constituency. Kotak, representing BJP in the BMC, is ready to rally around Ward 125 in Ghatkopar east area. It’s about 7:30 pm on a hot April e

Modi is now the topic of a PhD thesis

Sunil Bhatt, a Gujarat-based professional, has completed what is possibly the first PhD thesis on prime minister Narendra Modi. The thesis, titled ‘Leadership, Governance and Development: A case study of Shri Narendra Modi’, has been accepted at the Veer Narmad South Gujarat Universit



Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter