The way forward
It is the responsibility of government and RBI to ensure that the PNB fraud’s potential dent to confidence is not enduring
It is the responsibility of government and RBI to ensure that the PNB fraud’s potential dent to confidence is not enduring (File)
Till l’affaire Nirav Modi broke out, the worst appeared to be over for India’s banking sector. The Narendra Modi government had announced a capital infusion of Rs 88,139 crore into public sector banks (PSBs) as the first tranche of a Rs 2.11 lakh crore package to strengthen their balance sheets.
That, along with the “resolution” process in some 40 defaulting companies being taken up under the new Insolvency and Bankruptcy Code, was seen to go some way in addressing their massive bad loans problem. With the broader economy, too, gradually recovering from the disruptions of demonetisation and the GST, the stage was set for PSBs to make adequate provisions against non-performing asset accounts and resume lending. Or, so it seemed.
That hope has been dealt a severe setback. Last week’s revelations of fraudulent transactions involving the Punjab National Bank (PNB) and firms linked to Nirav Modi and the Gitanjali Gems group belonging to the fugitive diamond billionaire’s uncle, Mehul Choksi, could prolong the banking industry’s woes.
Currently, there is no clarity over the exact exposure, not only of PNB, but even other banks, to these companies, whether through direct loans or guarantees. Either way, the earlier assumption that the ratio of PSBs’ stressed loans to their total advances had peaked at 16.2 per cent in end-September 2017 may well have to be discarded. If that entails additional provisioning, it means continued low or even negative profits for the current and next quarter as well.
But more significant is the potential dent to confidence. If the PNB-Modi-Choksi fraud leads to banks turning overcautious — including losing faith in letters of undertaking and guarantees issued by one another — it could affect credit flow to sectors beyond just gems and jewelry. This is where the role of the government and the Reserve Bank of India (RBI) comes in.
The RBI cannot wash its hands off the PNB mess by simply blaming it on “failure of internal controls” or “delinquent behaviour” by some employees. Nor do the ongoing raids by enforcement agencies on the offices and showrooms of the Nirav Modi/Gitanjali groups, along with seizure of diamonds and jewelry, make for a pretty picture. The nefarious actions of promoters should be separated from the establishments being managed by them.
If these are running businesses, which they appear to be, no purpose is served by attaching or seizing their assets. There is, after all, today an established insolvency and liquidation process for recovering money due to creditors. The government can probably learn from the Satyam scandal of 2009, the conviction of the IT services firm’s erstwhile promoter, its merger and subsequent turnaround under a new management.
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