By now, everyone has heard of the biggest banking scam ever in India. As usual, the political blame game is in full swing. The scale of the scam and the details are still unfolding. This has thrown up a number of important issues.
One, that a scam of this magnitude - involving more than Rs 11,000 crore but possibly a lot more as more information is unearthed - could occur and remain concealed for at least seven years shows that something is seriously wrong with the system of checks and balances in banks. It is unbelievable that a couple of bank officials can bypass the system so easily for so long, despite routine audits. If that is possible, then there is no guarantee that similar bank frauds have not happened in other banks. A combination of some corrupt businessmen and bank officials is unlikely to be a one-time unique event. Crimes will occur if the system permits, irrespective of which political party is in power.
Two, increasing reliance on automated systems and passwords, without manual verification and counter-signatures of a number of bank officials, even when crores of rupees are being transferred in foreign exchange to parties located abroad, has an inherent danger. Earlier, fraudulent transfer of huge funds was perpetrated on Bangladesh Reserve Bank. An Indian bank somehow could stop a similar transfer at the last moment because the criminal made a small mistake. All these show that in automated computerised systems, nobody's money is really safe from fraud.
Unauthorised transfers of funds, especially with online banking and debit/credit cards, take place often, victimising a lot of ordinary people. Since these involve small sums of money, they go unreported in the media. Only the affected parties go through enormous troubles trying to recover the money.
No CBI or ED comes to help them. At one bank branch, I recently overheard the bank officer advising a half-literate customer who was complaining about someone having done unauthorised money transfers using his debit card without his knowledge. The officer told the man that people like him should not apply for debit cards and should do only cash transactions. This, when the present government
is pushing people to digitised payments!
Three, the ease with which the fraudsters and their families can leave the country just before the FIR is filed with the investigating agencies points to connivance between the fraudsters and the higher-ups in administration. Passports are sought to be revoked only after the fraudsters have left the country.
In some cases, these people already have or could easily manage to secure passports of some other country by virtue of their money power. Many countries allow people to get citizenship easily if they are willing to invest a certain amount of money there. This is not the first time this has happened, and it won't be the last either, no matter what the government says.
And, then, successive batches of CBI and ED officials, with a battery of expensive lawyers, go abroad, at taxpayers' expense, trying unsuccessfully to extradite the criminals from their safe havens. All these seriously undermine the common peoples' faith in the rule of law.
Four, even when in some rare cases some wealthy and influential politicians and businessmen (or even big goons) have to spend time in jail, they enjoy a life in prison that is not permitted for ordinary criminals. Also, the jail terms and financial punishments are not stringent enough to be exemplary deterrents. One can argue that the laws permit light sentences. If so, then the laws need to be changed by our parliamentarians. Unfortunately, our MPs are more interested in raising slogans than changing laws as corrupt politicians and cronies exist in all parties.
Axe falls on depositors
Five, though several banks have suffered losses due to fraud in one bank (PNB), understandably, the RBI would want to restrict the adverse 'network effect' on the entire banking system by asking PNB to absorb the whole loss. This way, the systemic effect of the fraud would be contained. Eventually, the guilty bank would get more capital from the government to absorb the loss. The costs of private crimes would be socialised and passed on to ordinary depositors and honest taxpayers.
Unfortunately, there is no other option. No big bank can be allowed to go bankrupt because that would rob millions of ordinary depositors of their hard-earned money. In the prevailing outrage, we should not forget that all NPAs are not caused by fraud or wilful defaulters. Some are due to genuine business failures (like what is happening to some of the steel companies as a result of court-ordered cancellation of coal and iron ore mining licences and global excess capacity).
Six, privatisation of public sector banks is not the solution. In all capitalist countries, losses of private banks are routinely absorbed by the government to prevent bank failures and avert larger financial crises.
The implicit sovereign guarantee through public sector banks has prevented bank failures and protected depositors' interest in India, unlike in the pre-nationalisation era. In addition, public sector banks have spread banking to rural areas and mobilised savings for national development. Private sector banks provide better services to customers by limiting the number of customers by requiring a much higher minimum balance. They would not open rural branches or service poor customers.
What we need is not privatisation but reforms that ensure less government interference in granting of loans, better risk management practices, securing more than sufficient collateral from big businesses against loans, and having a fool-proof audit system to detect irregularities at the earliest.
Finally, a system of international cooperation and coordination is needed so that wilful defaulters and fraudsters do not get safe haven abroad and are extradited to their home countries to face trials. But given the self-interest of many politicians and their cronies in all countries of the world (capitalist, socialist, democratic, authoritarian), it is easier said than done.
(The author is a former Professor of Economics, IIM, Calcutta)
Deccan Herald is on WhatsApp Channels| Join now for Breaking News & Editor's Picks