The debate on the fraud perpetrated by Nirav Modi and Mehul Choksi on Punjab National Bank has shifted to privatisation of public sector banks (PSBs). Independent directors, some non-banking financial company (NBFC) heads and even private bankers are advocating that the government should move towards privatisation of banks. The argument: PSBs are corrupt, they do not have the right systems and thus have become a cesspool for corruption.
If these people knew the history of banking, they would remember that the foundation of banks or even central banks was laid by a charlatan called John Law in the 18th century. And if you scratch the surface of any private bank you will find corruption.
Whenever corruption is talked about, it is seen in the context of political corruption, where businesses pay the political or bureaucratic leadership to get unfair things done. What is bigger than the business-to-government (B2G) corruption is business-to-business (B2B) corruption. The latter is much bigger but unfortunately, it is rarely talked about.
And the businessmen hide this dark secret as the rich vein of corruption benefits them all. Even the mass media rarely covers it with the same tenacity with which it covers a B2G scam. The reason is not so difficult to seek: B2B corruption affects their advertisers directly. It is always easier and better to turn public ire towards the government and paint every incident of fraud as B2G corruption. Hence even the debate on the recent PNB fraud is discussed as a Congress or BJP scam, while it is first and foremost a B2B scam.
Nirav Modi and Mehul Choksi corrupted and co-opted employees of PNB into issuing and rolling over their LoU (Letter of Undertaking). They also co-opted staff in other foreign banks—both public and private—into giving them the credit based on these LoUs. Remember, the funds were released by the foreign branches of Union Bank of India, Allahabad Bank and others.
Besides the fraud on import credit, several private sector banks gave term loans which exceed `3,000 crore. Why did these private banks lend to Gitanjali group, in spite of adverse comments by auditors, charges of custom duty evasion and even complaints by senior ex-employees? If the private banks are so good why did they not identify the fraudster? Can the complicity of their employees be ignored completely?
The involvement of private banks is not mentioned as it does not fit into the popular narrative of painting PSBs as failures. The people asking for privatisation need to see it as a failure of banking. Privatisation in haste will only benefit a few at the cost of many. The NBFCs, with the aspiration of becoming a bank,will lap up the PSBs quickly. Private banks will also be acquirers or lead managers to privatisation, so the advice needs to be taken with a truckload of salt.
The bank-to-business corruption exists both in PSBs and private banks. The degree of control, vigilance and extent vary across banks. But corruption is common in both kinds. Any businessman who has tried to get the overdraft limit increased or sought an extension for payment of a term loan knows that the branch manager wields enormous powers. Depending upon the morality of the manager, the bribe is paid. No loan or benefit given by any bank to a business comes without a favour. The favour has to be returned in kind or cash. If private bankers say that it does not happen in their banks, they are living in a fool’s paradise. Public sector banks no doubt have looser controls and more of a command-and-control culture. As a result, corruption is more prevalent there.
In private banks these practices are more institutionalised. As a matter of fact, the branch manager even terms this as his special relationship with the key corporate customers. Therefore, this hypocrisy that corruption exists in only PSBs must be laid to rest.So naturally, it does not make sense to just privatise public sector banks. But a crisis should not be allowed to go waste. It is important that the process of governance of all banks be revamped. Too much discretionary power in the hands of any individual is not good for governance and gives rise to corruption.
The rise of NPAs in banks is a symptom of this problem where individuals in both private and PSBs funded dodgy promoters. This was mostly due to the ability of these promoters to grease the palms of the officers. A small and micro entrepreneur cannot give money upfront; hence they are not part of the great lending game played by the banks. But a few promoters keep raising funds for dubious projects as they are able to give money upfront to get the loans approved.
It is for the same reason that farmers still do not get the benefit of the government schemes or subsidy on loans. It is because employees in banks who are responsible for clearing these schemes ask for money upfront. And a poor farmer just cannot afford it and the rich farmers corner all the subsidies.
The need is to reform governance in banks—both private sector and public sector. Why should an individual continue to head the bank year after even though the bank has been guilty of piling up NPAs? Think of all the top private banks first before you think of PSBs. Governance in private sector banks is feudal with leaders refusing to retire. Governance is bad across the banking sector and privatisation is no panacea to human greed.
K Yatish Rajawat
Digital strategist and policy analyst
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