Question

Back in the dumps, India’s state-owned banks endure a string of bad news A brief flurry of optimism in the sector comes to an end Print edition | Finance and economics Feb 15th, 2018| MUMBAI OF LATE Indian bankers have felt an unfamiliar sensation: optimism. A 1.3trn-rupees ($21bn) bail-out from the government seemed to have cleaned up the bad lending decisions of years gone by. A new bankruptcy law gave them an edge in long-standing battles with recalcitrant borrowers. It seemed a few Indian companies, having for years eschewed fresh investment, might even start borrowing again. This week woes linked to mismanagement at India’s three biggest partially state-owned lenders plunged the bankers back to their habitual gloom. On February 14th Punjab National Bank (PNB) announced it was investigating a fraud worth 114bn rupees, equivalent to about a third of its market capitalization. A few days earlier the State Bank of India (SBI) unveiled its first quarterly loss since 1999. And Bank of Baroda has hastily announced the closure of its South African operation, accused of having shady business associations there. The Punjab heist is potentially the most serious. The second-largest nationalized bank admitted that employees in Mumbai had approved transactions that left PNB on the hook for $1.8bn. This suggests, to put it mildly, some lacunae in how the place is run. Its shares fell by over 10% as investors tried to assess whether the sum had been lost or was merely at risk. The bank has reportedly filed a complaint against a jeweler, Nirav Modi, and some of his family and businesses. Its accusation, to which Mr. Modi has not responded, is that he induced bank employees to issue letters of credit, which were left off PNB’s books. The letters of credit seem then to have been used as security to borrow from other banks overseas. Mr. Modi says he is willing to sell his businesses to make the banks whole. SBI’s troubles are far easier to grasp. Like other state-owned lenders, which control about two-thirds of assets in the banking system, SBI has repeatedly had to adjust its quarterly profits to recognize that some loans made in past years are unlikely to be repaid. Losses linked to bad loans soared in the most recent quarter, in part because the Reserve Bank of India, the regulator, forced SBI to recognize even more of its loans as duds than it had done previously. The regulator did not say whether it regarded SBI’s management as negligent, or dishonest. Finally, Bank of Baroda, the third-largest nationalized lender, on February 12th announced it would be pulling out of South Africa, one of a handful of markets it had entered in the past two decades. Its strategy of building its franchise by lending to the Indian diaspora had not reckoned with the Gupta brothers, three financiers accused of having undue influence in President Jacob Zuma’s inner circle. An investigation by the Hindustan Times and others detailed how Baroda stuck by the Guptas even as other banks pulled back. Baroda says it is co-operating with South African authorities, which are investigating. The bad news has helped to wipe out half the share-price gains of the 21 state-owned banks after the government’s rescue plan was unveiled in October. Most are trading below the stated value of their net assets, implying investors still don’t trust their accounts. Taken together, all the nationalized lenders are now worth less than HDFC Bank, a single private lender. It may be some time before optimism returns.

What was your reaction when you read this? What did you learn from this? What do you think is the solution to this problem.

Could similar problems arise in the USA? If so, what needs to be done nwo?

Answer 1

Q) What was your reaction when you read this? What did you learn from this? What do you think is the solution to this problem.

A) Definitely, I was shocked at first instance after reading this. This is something unimaginable. The only positive thing about this is that other countries can learn and try not to repeat the same mistake so as to prevent from getting long-term global-level brand damage. I am still wondering how can a single person commit a fraud of ₹114 billion and escape from the concerned country.

Are the intellectual officers so dumb?
Where is the morale of the people commiting such sins which ultimately affects poor section of the country?
Is the government so ineffective to just see the show and clap the hands?
Is the internal control system of the banks (being the strong pillar for any country) is so weak?
What are the auditors doing?
Why the other countries support such fraudsters by encouraging them simply because they bring the money into their country?
Why scope of the laws of India or any such country (where such frauds take place) is so narrow that we can't catch a person who has flied away inspite after knowing that he is a fraudster?
What if the government is largely involved in such kind of PSU frauds by initially promising to waive off the NPAs and provide a helping hand to the PSU banks and then, loot the public at large?
Why a poor person receives threat from banks even if he defaults on one his EMIs whereas in such frauds, the investigation starts after the fraudster has flied away from the country?

There are a lot of questions which would be unanswered! Hence, there is no single / blanket solution to such kind of problems! However, some things which can be improved / implemented which can eventually reduce, if not completely eliminate, such kind of scenarios:

- Law for criminals / fraudsters at a global level should change to increase the ambit.
- A strong internal mechanism should be built up in such banks, checker-maker concept should be rigidly followed, severe punishments should be imposed, etc. Everything should be digitised even in PSU banks.
- A strong political atmosphere is absolutely necessary because the base reason for all such problems starts from politics.
- Auditors should conduct their work with more diligence and caution.
- Most importantly, it is the people who build a country and hence, a better world to live for all of us. Unless and until, each individual say NO to such fraudulent practices, all other solutions would fail to completely eradicate such sinful scenarios.

THUS, A CHANGE IN THE CHARACTER AND THE MINDSET OF EACH AND EVERY INDIVIDUAL IS UTMOST IMPORTANT.

Q) Could similar problems arise in the USA? If so, what needs to be done now?

A) Yes, absolutely!

Inspite of the fact that USA is the strongest country in the world and most developed too, such scenarios can easily be witnessed, may be now or later!

Again, there is no single / blanket solution to such kind of problems! Though, some points which can be improved / implemented which can eventually reduce, if not completely eliminate, such kind of scenarios in USA:

- Law for criminals / fraudsters should change to increase the ambit and severe punishments should be imposed.
- A strong internal mechanism should be built up in all the banks, checker-maker concept should be rigidly followed, etc. Everything should be digitised / automatised.
- A strong political atmosphere is absolutely necessary because the base reason for all such problems starts from politics.
- Auditors should conduct their work with more diligence and caution.
- Again, most importantly, it is the people who build a country and hence, a better world to live for all of us. Unless and until, we say NO to such fraudulent practices, all other solutions would fail to completely eradicate such sinful scenarios.

THUS, A CHANGE IN THE CHARACTER AND THE MINDSET OF EACH AND EVERY INDIVIDUAL IS UTMOST IMPORTANT.