The latest PNB scandal is just an example out of innumerable cases of default that led to India’s NPA crisis, which is mainly a contribution of PSBs; if you still insist an Indian bank must be state-sponsored, do not cry foul when the next Nirav Modi or Vijay Mallya surfaces

The scandal of jewellery designer Nirav Modi absconding with people’s money after cheating the Punjab National Bank (PNB) of more than Rs 11,000 crore, which shocked the nation on 15 February, has unravelled the country’s sickening socialist economy, which suited the Indian National Congress (INC) and which Narendra Modi does not have the courage to reform. If not after realising that the scams of the era of United Progressive Alliance (UPA) government had given his party a wonderful electoral plank, the prime minister should have set out to privatise as many nationalised banks as he could when, following his Australia visit, the State Bank of India granted to Gautam Adani a handsome loan. This is not to buy the conspiracy theory that Adani is a dubious business operator or that the prime minister has some truck with the industrialist. We are making a simple point that public sector banks (PSB) are prone to cronyism regardless of the fact whether a certain deal smacks of a deliberate favour extended to the business house by the government of the day. The merits of the Ambani-Adani rhetoric are irrelevant, but this is as much a political point as an economic one, which the politician Modi can appreciate.

Alas, the prime minister’s assurance before getting elected in 2014, “the government has no business to be in business,” was sacrificed at the altar of electoral politics after the Bharatiya Janata Party received a drubbing in the hands of two hardcore socialist groups — the Aam Aadmi Party and the Janata Dal (United)-Rashtriya Janata Dal alliance. This, even as both Modi and Union Finance Minister Arun Jaitley had assured the nation following the defeat in Bihar that “reforms” would go on unaffected by the election results. If, drawing wrong lessons from the Atal Bihari Vajpayee government’s defeat in 2004, the current dispensation has come to the conclusion that the electorate is by and large incorrigibly socialist, why did Modi not make use of his gift of the gab and terrific mass connect to explain to the poor how socialism does nothing for them except concentrate discretionary powers to a handful of bureaucrats whose job security and guaranteed salaries leave them with no reason to serve the people? If he could issue sermons on how to raise the girl child and how to keep the cities clean, he could have well spared a few speeches on radio, on the occasion of the Independence Day or during an election rally, for sharing some vital lessons of economics. Or, rather than (uselessly) boasting of being the world’s largest political party, BJP president Amit Shah could have asked a few hundred from the 11 crore party members to volunteer to visit villages and poor urban pockets to explain to the have-nots how socialism drains them out and why the country must move towards a free-er market.

Since the fourth year of a government’s tenure is too late for reforms, let’s see how the crooks executed their plan in the case of PNB, exploiting the loopholes of the system, with the hope that the next government — of the BJP or of the parties that now make the opposition — start privatising the banks right after the swearing-in ceremony of 2019.

A letter of undertaking (LoU) is a banking service where the bank guarantees that the customer is obliged to repay a certain amount to a third party, bound by the provisions of a contract. Nirav Modi would secure these LoUs from the PNB, show it to other banks in the country or abroad, and get credit from those banks based on the assurance from the second-largest public sector Indian bank. In the country, Union Bank of India, Allahabad Bank and Axis Bank fell for it. An exhaustive list of the banks Nirav duped overseas is yet to be made. Three other jewellers, Gitanjali, Ginni, and Nakshatra followed a similar modus operandi with various banks and also while using the borrowed money. The largest bank in the country has its own share of black sheep among its customers even though Nirav Modi spared it the horror.

As our editorial on the issue has explained, this culture of fraudulence developed under the UPA regime. As suspected by several economic observers in 2014, what Narendra Modi noticed on coming to power were statistics so scary that, if revealed, would make international investors flee the country as they would lose faith in its economic fidelity. When UPA retained power in 2009, an interesting phenomenon was observed in the banking sector. PSBs gradually overtook private banks in NPA score. It seems, mistakenly assured of a long stint in power without scrutiny, thanks to a considerable increase in the number of Lok Sabha seats of the INC and PSBs recording a profit of 16,856 crore by 2008-09, the Manmohan Singh government asked the PSBs to relax the rules of their assets departments. And they turned desperate by March 2014 when a change in government became imminent.

Farm loans were not only waived with gay abandon, but there were scams in the waivers too. The crisis aggravated as India had to repay $172 billion worth of debt by March 2014. The assertion, which some media houses make, that the percentage, as well as absolute amount of NPA, is higher now, misses the point that the defaulters are the same. Essar Steel, Lanco Infratech, Bhushan Steel, Bhushan Power and Steel, Alok Industries, Monnet Ispat, Era Infra Engineering, ABG Shipyard, Jaypee Infratech, Electrosteel Steel, Amtek Auto, Jyoti Structures, etc — most of which are about to declare they are bankrupt — had all started borrowing indiscriminately from the PSBs under the UPA rule. The NDA government is guilty of not being able to deny life-saving oxygen to the basic metals, cement, textiles, automobiles, construction, paper products, food processing, mining, engineering, gems and jewellery, chemicals and rubber industries.

Narendra Modi inherited a legacy of eight PSBs suffering bad loans out of the 10 in that category. It has become nine out of 10 with the further passage of time. PSBs hold 90% of the total NPAs now. But if Winsome Diamonds is considered, it becomes a case of criminal negligence of duty by the Central Bureau of Investigation that could not conclude its probe into the group’s bank dealings in the three years since the National Democratic Alliance (NDA) government ordered the inquiry.

The prime minister who gave the country the mantra of self-employment through schemes such as Mudra and Stand-Up India should be rather disconcerted. Juxtapose the provisions of Credit Information Bureau (India) Limited (CIBIL) and the situation of non-performing assets (NPA) of the banks, and an irony unfolds. Law-abiding loan applicants are harassed with citations of their faulty CIBIL scores and Mudra does not reach the needy entrepreneur because the bank manager is wary of creating more NPA while the filthy rich swindle away taxpayers’ money with impunity.

That the class of needy applicants is not responsible for the NPA mess accentuates the mordancy. Furthermore, there is a mini-scandal in the claim the present government makes about Mudra. A substantial chunk of the amount said to have been disbursed is nothing but pre-existing loans now masquerading as Mudra loans. Is this why, while the prime minister organises a meeting with the beneficiaries of Ujjwala, there is no (publicised) meeting yet with young men and women who have their rags-to-riches stories to share?

Among the major economies, India (9.6%) is second only to Italy (16.4%) in the volume of stressed assets held by lending institutions. During the first year of this government, media reports had pointed out this situation had suffered irreparable damage in the previous 13 years, which is to say that the rogues had started their operations towards the fag end of the Vajpayee regime and were brazening it out under the Sonia Gandhi-Manmohan Singh reign. However, since the industry could not be brought to a standstill, PSBs allowed the bad loans to increase from Rs.1,55,890 crores in 2013 to Rs.6,41,057 crores in 2017 — an increase by 311.22%.

Studying Anil Ambani’s part of Reliance would be in order to explain why or how bad banking decisions continue to be accepted. More than 10 banks refused loans to the younger brother’s Reliance Communications (RCom) owing to his poor record in repayment. By May 2016, the part of Reliance that is with Anil owed Rs 1,21,000 crore to several banks. Now, letting these companies shut shop would mean not only a collapse of the networks they have built, affecting lakhs of customers but also thousands of employees the companies offer a livelihood to. Keynesian that our governments are, they believe pumping state money into the market revitalises it. PSBs come in handy when this is the state policy.

bank scamPrivate banks would flatly deny the loans saying that keeping other companies running is no obligation of theirs. But in order to continue playing the socialist game, where the government is ‘by the people’, the Indian state owns 75% of the country’s banking assets, surpassing a ‘communist’ China that keeps a much less 51% with the state.

A comparison with Mukesh Ambani’s companies would explain why neither is Mudra working nor are the established industries offering lakhs of jobs. His enterprises are much healthier and are, hence, offered loans, but they don’t quite need borrowed money for sustenance or expansion drives. It’s thus the same old vicious cycle: be rich to be eligible for a loan, but if you are rich, why would you need a loan in the first place? And if government money is not energising the market, what’s the point pouring more of it in?

It will be grossly unfair, however, of a commentator to infer that the Modi government has been sitting pretty on the investigation files for about four years. It is not just the past 24 hours when raids galore have been conducted on the dubious Nirav Modi. If the fraud the jewellery designer committed is worth Rs 11,500 crore, the law enforcement agencies have seized about Rs 6,000 crore worth of his properties from different search operations already. This has also been an unsparing, unrelenting government chasing black money.

Narendra Modi’s problem lies in a terrible shortage of innovative ideas in economic policy and unquestioned reliance on the system built by the British and nurtured by the longest ruling party, the INC. Central Board of Direct Taxes officials confide in journalists these days that their powers to harass taxpayers have risen to monstrous levels under the current regime. To what avail? Instead of ensuring that every taxpayer in a country of low per capita income pays about 30% of all that he earns — income and consumption taxes included — the Union government could have reduced the tax burden so drastically that compliance increased and it attracted foreign investors as well as those who have stashed Indian money abroad back to this country.

The law on corporate social responsibility could be altered to make private companies build the infrastructure that is so far built poorly and inadequately on the revenue collected by government. That would be a quantum leap from the concept of public-private partnerships. The business corridors that the prime minister sought to build during the initial period of his tenure could be built by prevailing upon all BJP-ruled States to make their economic laws uniform to save the investor from the eccentricity of the Indian market. The vagaries of operations businesses suffer when they try to work nationwide were never limited to the provincially collected taxes that have vanished due to the goods and services tax (while increasing accounting hassles). The indigenous and foreign businessmen would together create the jobs needed, make Indians richer as well as tax-compliant.

What did the NDA government try? The Financial Resolution and Deposit Insurance Bill, the institution of the Insolvency and Bankruptcy Code, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, and the Recovery of Debts due to Banks and Financial Institutions! These methods have failed wherever these were tried. While the amount recovered by auctioning seized properties hardly recovers the money lost on bad loans, the RBI is unhappy about the board of the Resolution Corporation’s composition. Six members from the Union government out of 11 make it the decision maker in a domain that belonged to the central bank earlier. Next, the reader will realise that this does nothing to address a PNB-like issue.

It is not feasible for any government to keep track of Nirav Modi’s kind of transactions unless some bank officials raise an alarm, which they did recently. Nirav used to approach the PNB for LoUs. Some of the 10 officers who have been suspended would use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) procedure to process the request. This would not reflect in the record books. SWIFT would be used to seek a letter of credit (LC) from a bank overseas in lieu of the LoU. The amount obtained would go to the suppliers of Nirav in cash. These suppliers were mostly sister concerns of the indebted. However, if Nirav did not pay when the LC matures, it should have triggered a Nostro account, which is PNB’s account held in a foreign country, denominated in the currency of that country. This account could hold PNB liable for the payment. It attracted the attention of some scrupulous employees of the bank eventually, who blew the lid off Nirav’s cover. At the same time, those in cahoots with the jeweller had ensured for a long time that the Nostro account did not trigger off. And they could get away with it because PNB had no concrete mechanism to keep a tab on the messages some of its employees exchanged through SWIFT.

If the PNB management was responsible for ignoring the capital inadequacy to entertain a customer like Nirav, the Reserve Bank (RBI) was equally callous towards regulation. How could the central bank permit some bank employees’ free access to SWIFT?

To elucidate the whole affair, let’s strip further commentary of all jargon. Why are private banks not suffering so badly from NPA? Because the authority that sanctions large credits is limited to a handful of employees, sometimes just to one officer. Any hanky-panky at his or her desk alerts the bank owner immediately. In a sector where a well-paid job is lost at the drop of a hat — and the news of unethical conduct spreads like wildfire in the industry, pre-empting another job — few attempt a misadventure. On the other hand, in a bid to make the process ‘democratic’, the authority is distributed in a PSB. These bankers with discretionary powers entered a nexus in PNB.

The absolutely uninitiated reader must be told, when a private bank loses money, it is the loss of the individual who owns the bank. When a PSB loses it, it is your and my money. The notion that one’s money is always secure with government had suffered a rude jolt when the Unit Trust of India scam unfolded. And when a government finds itself incapable of recovering your money, it takes more money from you to ‘restructure’ the bad loans; it is also unable to reduce your tax burden even if it wants to. If you still believe a whole lot of banks in India should stay nationalised, do not cry foul when the next Nirav Modi or Vijay Mallya surfaces.