India has 27 banks in which the government holds majority control. Most of them were nationalised. These banks control some 70 per cent of deposits and loans. The non-performing assets (where borrowers are not meeting their interest/repayment obligations) are frighteningly high, estimated at ₹7 lakh crore. These are legacy loans, carried away from an earlier government which used to wink at corporate borrowers (who also double up to fund elections) and which introduced several schemes to roll over loans when they became due. Thus, the snowball of bad loans kept getting larger and everyone behaved as if things were normal, when they weren’t.

The latest scam is that of PNB, the largest bank after SBI, giving letter of undertaking (LoU) facility to Nirav Modi aggregating $1.8 billion over the years, is an example of why the government should sell the banks.

This column has been suggesting this for several years. The Chief Economic Advisor has also raised this poser recently.

An honest government, with no vested interest, would agree, and start the process of cleaning up the banks prior to selling them. In order to maintain the safety of the financial system, it need only retain SBI plus, maybe, one more large bank, say, Bank of Baroda, and divest its entire holding in the others.

Several questions in the PNB episode need answers.

Why were red corner notices not issued before going public with the scam? Don’t banks have enough common sense to learn from experience? When others (Vijay Mallya, Lalit Modi and others) have fled, should banks not first take the precaution of approaching law enforcement agencies to prevent them from fleeing?

Why was there a single layer of approval? Is the public so gullible as to believe that a lowly officer has the power to issue, over the years, $1.8 billion of guarantees without authorisation from a superior officer? It seems fair to assume that the rot goes higher and, considering the amounts involved, senior people were involved.

The officer concerned used the SWIFT code to bypass the core banking system. How is this possible? How can these transactions stay hidden and undetected for years? Is there no reconciliation done at all?

It appears that the diamond trading community was well aware of these scams, years ago. Did PNB do any due diligence? It appears not. They did not personally verify the presence of ‘independent directors’ of some shell companies, found, by an investigative reporter, to be living in chawls and hardly credit-worthy as directors for multi-billion dollar loans (without any collateral). If a lowly reporter of a small newspaper can investigate, what do banks do by way of due diligence?

Added to this is the huge understaffing of the National Company Law Tribunal (NCLT), meant to hear the pleas under the Bankruptcy Court. This is where cases of defaulting borrowers are referred to. The understaffing of the courts means that cases will drag on for years, banks will continue to bleed, the credit arteries will be choked and scamsters will be encouraged to do bigger scams. It is sick!

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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