The uncovering of Rs114 billion fraud in Punjab National Banks, Brandy House branch has shot PSBs into the limelight for wrong reasons. It is alleged that diamond merchant Nirav Modi managed to issue LoUs from the branch that was not authorized by its management. These LoUs allowed Mr. Modi's companies to obtain loans from the overseas branches of various Indian banks. PNBs internal information system (Finacle) wasn’t linked to Society for Worldwide Interbank Financial Telecommunication (SWIFT), a messaging network that connects banks and other financial institutions across the world. Hence, the LOUs went unnoticed and undetected since 2011. The fraud came to the notice of the management after the retirement of the Deputy Manager, who is alleged to have issued these LOUs on his own. What is difficult to fathom is that neither the auditors –internal & external- nor the bank supervisory were able to foresee this, that too for years. The management certainly did not stick to the basic concept, conventions, and prudent banking supervisory mechanism in place to manage such risk. Banking involves a fair amount of risk: credit, market, and operational being the major risks. What is important though is how the bank manages and mitigates such risks. In this case, the bank failed to manage the operational risk, hence embracing the business, reputation risk, and liquidity risk. Meanwhile, the investigating agencies have sealed the properties of the accused. The malfeasance and company officials involved in this fraud are behind bars and interrogation is on. Amid all this, the common man is in sheer disbelief by the quantum of the amount involved -with his mouth agape. To add to his dismay and disbelief, the main accused has left Indian shores surreptitiously for greener pastures just before the disclosure of this fraud. (An officer in PSBs is transferred after completion 3 years tenure at a particular branch, in this case, the officer was not transferred even after completion of his tenure. And surprisingly was allowed to continue in the same branch for seven years and that too holding the same work profile. Had the officer been transferred after completion of his tenure the fraud could have been avoided.)
Fallout is predictable and somewhat surprising too. The top management seems invisible, apart from the lone anodyne press conference and few press releases imploring the public to evade rumors and have faith in the bank. The regulators are somewhat mute; I wonder on whose behest. Embolden by this event certain section of media and industrial association (CII& FICCI etc ) is setting up an enormous clamor for the privatization of PSBs. Irony though is the majority of the wilful defaulter or companies defaulting the loan payment of PSBs are some way or the other associated with these associations. Whereas ramifications should have been the other way round: these associations should have advocated for improved credit culture and adherence to law among its members and associates. Those with commercial interests in India and various international agencies have been pushing for the privatization of PSBs for some time now. This event will surely embolden their spirit and make their case stronger. Going by their argument change of ownership will usher new baking revolution and act as a panacea for all ill of PSBs. Ad infinitum, history tells us that privately owned banks are not immune to frauds. In fact, the biggest scams in the banking history included the privately owned banks: USB, Swiss bank was involved in $2 billion fraud in the year 2011, cross-selling fraud at Wells Fargo in the year 2013; Citi Bank was involved in Harshad Mehta scam in the year 1992 and LIBOR rigging in the year 2012 by various private banks to name few. Another argument that is given for change of ownership PSBs is that these banks lack the incentive to perform. An incentive can be double edge sword; the evocative memories of the Sub-prime crisis of the years 2008-2009 that collapsed various banks are still afresh. The greed for incentives induced bankers to take unnecessary risks and breach laws and regulations to appease the shareholders. Consequently, several banks crashed which lead to an economic downturn worldwide. Eventually, the US Government had to bail out the banks—with taxpayer’s money amounting to a staggering $24 billion.
The management of the PSBs and Private owned banks in India is a study in contrast. So, it’s unfair to judge the performance of PSBs and privately owned banks on the comparator as both are different in nature and objective. PSBs are socialistic in nature compared to profit-driven private-owned banks. Both have a different target customer group as well: Private-owned banks mainly cater to the rich and their reach is restricted to metros, Tier1 and Tier 2 cities compared to PSBs whose have a wider reach and pan India presence. The performance of PSBs in implementing various government schemes is far more superiors to private banks. During the Jhan Dhan campaign, the same PSBs took the charge whereas private-owned banks offered mere tokenism.
Keeping in mind the changing demography and social structure, PSBs over the years started product diversification. It helped PSBs to compete with privately owned and foreign banks. Capacity building of the human resource required for successful implementation of product diversification wasn’t done. It left the human resource of PSBs dispirited and this has started to reflect in their work. No doubt, product diversification is a positive step as at takes PSBs banks at par with private and foreign banks in terms of the product range offered is concerned. However, it requires dedicated manpower with technical know-how in addition to the capacity building of existing staff. Such aspects, sadly, remained neglected and repercussions are reflective when you talk to modern bankers.
The problem of NPA is the biggest issue the PSBs (Privately owned banks are also facing the same problem) are facing. The solution to NPA will require a sagacious and pragmatic approach by all concerned: RBI, PSBs, and most importantly the government. Each one of these had to play their part, that too effectively. Off laid the top management of the PSBs is more inclined towards cross-selling rather than managing its lending portfolio; as extensive cross-selling earns them hefty incentives. (Top management gets a well-paid holiday in South East Asia.) This has certainly diverted the focus of the bankers from strengthening the credit portfolio and proactive recovery process. Partially, this has led to an increase in NPA along with more thrust on implementing government schemes. The problem with implementing a uniform government scheme is that it may be of utility to a particular state; however, the scheme may not necessarily suit another state. Jhan Dhan campaign may have been a grand success in the un-banked remote village of Bihar, but the same cannot be said about the campaign in Shimla. As Shimla city has too many banks, here this exercise meant wastage of man-hours and duplicity of accounts. Another reason for NPA is the poor credit appraisal system in PSBs. Credit appraisal system in the PSBs banks needs major overall. To overcome this, the sound capacity building of human resources is required. NPA is a complex issue; a comprehensive plan, prudent financial and banking supervision is required to resolve it. That too at every level: from the regulator to government.
Diatribe and odium launched against the PSBs after the Nirav Modi episode are somewhat valid. Seriously lapses were made in this case that resulted in the loss of public money. Those responsible at every level should be punished. After all, banks are the custodians of the hard-earned money the public has deposited in them. The episode has shaken public confidence; misgiving about PSBs among the public is natural. Without dawdle, the loopholes need to be plugged. Remember our fulmination should foment the system for betterment; not to affront the public institution. We need to save PSBs, not as some crack has appeared; because they have succeeded for years-- it's worth investing in
Fallout is predictable and somewhat surprising too. The top management seems invisible, apart from the lone anodyne press conference and few press releases imploring the public to evade rumors and have faith in the bank. The regulators are somewhat mute; I wonder on whose behest. Embolden by this event certain section of media and industrial association (CII& FICCI etc ) is setting up an enormous clamor for the privatization of PSBs. Irony though is the majority of the wilful defaulter or companies defaulting the loan payment of PSBs are some way or the other associated with these associations. Whereas ramifications should have been the other way round: these associations should have advocated for improved credit culture and adherence to law among its members and associates. Those with commercial interests in India and various international agencies have been pushing for the privatization of PSBs for some time now. This event will surely embolden their spirit and make their case stronger. Going by their argument change of ownership will usher new baking revolution and act as a panacea for all ill of PSBs. Ad infinitum, history tells us that privately owned banks are not immune to frauds. In fact, the biggest scams in the banking history included the privately owned banks: USB, Swiss bank was involved in $2 billion fraud in the year 2011, cross-selling fraud at Wells Fargo in the year 2013; Citi Bank was involved in Harshad Mehta scam in the year 1992 and LIBOR rigging in the year 2012 by various private banks to name few. Another argument that is given for change of ownership PSBs is that these banks lack the incentive to perform. An incentive can be double edge sword; the evocative memories of the Sub-prime crisis of the years 2008-2009 that collapsed various banks are still afresh. The greed for incentives induced bankers to take unnecessary risks and breach laws and regulations to appease the shareholders. Consequently, several banks crashed which lead to an economic downturn worldwide. Eventually, the US Government had to bail out the banks—with taxpayer’s money amounting to a staggering $24 billion.
The management of the PSBs and Private owned banks in India is a study in contrast. So, it’s unfair to judge the performance of PSBs and privately owned banks on the comparator as both are different in nature and objective. PSBs are socialistic in nature compared to profit-driven private-owned banks. Both have a different target customer group as well: Private-owned banks mainly cater to the rich and their reach is restricted to metros, Tier1 and Tier 2 cities compared to PSBs whose have a wider reach and pan India presence. The performance of PSBs in implementing various government schemes is far more superiors to private banks. During the Jhan Dhan campaign, the same PSBs took the charge whereas private-owned banks offered mere tokenism.
No. of Beneficiaries in Crores as on 16.12.2017 | Deposit in accounts in crores | |||
Rural | Urban | Total | ||
Public Sector Banks | 13.3 | 11.5 | 24.8 | Rs.55646.6 |
Private Owned Banks | 0.6 | 0.4 | 1 | Rs. 2160.6 |
Source: GOI-https//pmjdy.gov.in/account
Similar is the case with priority sector-leading or contribution in financial inclusion-rarely private-owned banks meets their target in these two areas. Assets liability management in privately owned banks is way better compared to PSBs. We should not forget the PSB banks raised their performance between the years 2001 to 2010 and were giving private banks a run for their money. So, the arguments given for that change of ownership of banks will usher in an era of clean, problem-free banking that is foolhardy and ignorant of any sound economic logic. In fact, such a step will make the banking exclusive right of the rich and urban defeating the very objective of nationalization of banks.Years | Gross NPA Ratio | Credit growth % |
2005-06 | 3.5 | 31 |
2006.07 | 2.6 | 28.5 |
2007-08 | 2.4 | 23.1 |
2008.09 | 2.4 | 19.6 |
2009-10 | 2.5 | 17.1 |
2010-11 | 2.4 | 22.3 |
2011-12 | 2.9 | 16.9 |
2012-13 | 3.4 | 15.1 |
2013-14 | 3.8 | 10.9 |
2014.15 | 4.3 | 12.6 |
2015-16 | 7.6 | 10.7 |
2016-17 | 9.3 | 5.08 |
Source: Yojana January 2018
No doubt, PSBs are beleaguered by myriad problems and certainly have enough on their plate to ponder over. The dearth of quality human resources, mass retirements, amounting NPA, lack of sound credit appraisal system, undue pressure of cross-selling, infrastructure issues to name a few. An acute shortage of officials- especially at the middle and top-level- is due to mass retirement and inadequate recruitment. The recruitment done by the PSBs over the years is not sufficient to commensurate with the manpower requirement. To overcome the shortage of staff boards of many PSBs gave relaxation in promotion policy that leads to reckless promotions in these banks. To meet financial inclusion, PSBs has expanded its network rapidly that further aggravating the problem of staff shortage. A comprehensive career development program for capacity building and human resource management policy is the need of the hour.Keeping in mind the changing demography and social structure, PSBs over the years started product diversification. It helped PSBs to compete with privately owned and foreign banks. Capacity building of the human resource required for successful implementation of product diversification wasn’t done. It left the human resource of PSBs dispirited and this has started to reflect in their work. No doubt, product diversification is a positive step as at takes PSBs banks at par with private and foreign banks in terms of the product range offered is concerned. However, it requires dedicated manpower with technical know-how in addition to the capacity building of existing staff. Such aspects, sadly, remained neglected and repercussions are reflective when you talk to modern bankers.
The problem of NPA is the biggest issue the PSBs (Privately owned banks are also facing the same problem) are facing. The solution to NPA will require a sagacious and pragmatic approach by all concerned: RBI, PSBs, and most importantly the government. Each one of these had to play their part, that too effectively. Off laid the top management of the PSBs is more inclined towards cross-selling rather than managing its lending portfolio; as extensive cross-selling earns them hefty incentives. (Top management gets a well-paid holiday in South East Asia.) This has certainly diverted the focus of the bankers from strengthening the credit portfolio and proactive recovery process. Partially, this has led to an increase in NPA along with more thrust on implementing government schemes. The problem with implementing a uniform government scheme is that it may be of utility to a particular state; however, the scheme may not necessarily suit another state. Jhan Dhan campaign may have been a grand success in the un-banked remote village of Bihar, but the same cannot be said about the campaign in Shimla. As Shimla city has too many banks, here this exercise meant wastage of man-hours and duplicity of accounts. Another reason for NPA is the poor credit appraisal system in PSBs. Credit appraisal system in the PSBs banks needs major overall. To overcome this, the sound capacity building of human resources is required. NPA is a complex issue; a comprehensive plan, prudent financial and banking supervision is required to resolve it. That too at every level: from the regulator to government.
Diatribe and odium launched against the PSBs after the Nirav Modi episode are somewhat valid. Seriously lapses were made in this case that resulted in the loss of public money. Those responsible at every level should be punished. After all, banks are the custodians of the hard-earned money the public has deposited in them. The episode has shaken public confidence; misgiving about PSBs among the public is natural. Without dawdle, the loopholes need to be plugged. Remember our fulmination should foment the system for betterment; not to affront the public institution. We need to save PSBs, not as some crack has appeared; because they have succeeded for years-- it's worth investing in
