It is important to imbibe lessons and not go on a witch-hunt, says Sunil Kant Munjal
Some years ago, a well-known journalist wrote a book called Everybody loves a good drought. Through a series of articles, the book chronicled why droughts in India so easily become a political weapon and a tool for mobilising opinions. Perhaps, the time has come to write another book with a similar title: why everyone loves a scam.
In the mainstream and social media, for the past month or so, it somehow seems fashionable to portray the Indian banking sector, particularly the PSU banking domain, as an unholy alliance between Ponzi operators and immoral officials; one that is susceptible to rip-offs and cons. As this narrative of negativity builds, it is time to be rational and proactive.This is by no means, an endorsement or acceptance of errant behaviour being okay.
Accept reality: In every society there will always be some individuals and companies who will try to find ways to exploit flaws in any system. The best-intentioned and not just compromised — auditing, governance and vigilance systems, irrespective of whether they’re in India or anywhere else, become susceptible when pitted against greed and deviant human behaviour (lehmann Brothers, Enron, Nick leeson).
We may or may not choose to pass judgements over the turpitude that led to this crisis but it is patently wrong to blur the line between bona fide intent and malintent and categorise the entire business community or any industry as a den of thieves in cahoots with banks. As long as it is not an act of deliberate omission or commission, bankers should be allowed to do their job freely and fairly.
Prevention: Corrective action must be a constant and evolving exercise. Action must be process-driven and fact-based, not propelled by emotions and anger. The proposed legislation that seeks to prevent economic offenders from escaping overseas is significant and appropriate, but it is just one of many measures required to build a fool proof system.
Stronger checks and balances without creating excessive burden on the bank, clients are required to bring down the vulnerability of banking, especially when it comes to the credit process; yet it is not about adding layers of bureaucracy. It’s now quite convenient to talk about how the chain of command was not followed at PNB or at OBC or at any other banks but prevention must go beyond adherence to the chain of command. We must focus on how human manipulation can be nipped in the bud; the greater the scope for human intervention, the higher the risk.
Technology: As Aditya Puri of HDFC Bank has recently pointed out, nothing can ever be fraud-proof. Yet technological deployment and the ability of different technologies to “talk to each other on a real time basis,” can play a crucial role in risk mitigation.
Indian banks need to quickly complete the unfinished tasks of technological integration (the integration and reconciliation of SWIFT with core banking is just one example), and also invest in relevant skills critical in a globally integrated world.
The PNB affair highlights the importance of domain-specific knowledge. Who knows, if PSU bank officials, were better versed in the valuation of gems and jewellery, or if RBI officials were able to spot the inherent loopholes in the 80:20 gold scheme earlier, there might have been stronger checks and balances in place.
Ownership and accountability: There are inherent and inbuilt complacencies in a state-owned enterprise that are very difficult, if not impossible to eradicate without proper autonomy, and this is not possible without a change in ownership. No matter how much freedom is given to the management and board of a PSU bank; no matter how many professionals are brought in, the reality is political stakeholders and bureaucrats will still be able to exert unnatural influence and control which results in sub optimal decisions.
The irony is, many of these concerns were flagged by us as members of the Narasimham Committee on Banking Reforms more than 20 years ago. The committee recommended bringing down government equity to 33 per cent (It was even discussed that government should consider lowering equity below 26 per cent). Yet nothing has happened on that front.
Keep the faith: Today, just when GDP growth is on the uptick and credit flow to the corporate sector is reviving, and investment sentiment is picking up, banks are tempted to turn cautious. Currently, credit flow to the gems and jewellery sector has apparently dried up and in the coming months, officials might become risk averse while lending to other sectors as well which could hinder the Indian growth story.
So what are the optionsIJ Quite clearly, the circle of trust between financiers, regulators, policymakers, citizens and corporates need to be rebuilt quickly, even as loopholes are plugged. l’Affaire PNB should be treated as just another valuable lesson in governance and there should be no backward steps.
For centuries, India has followed a command and control system laid out by the British where laws were designed in a way that a few could control many. Rules were framed based on mistrust. This legacy continued for decades, right up to the 1990s. In the last 25 years, efforts have been made to dismantle this system of mistrust. This has made India a better place for businesses and citizens.
India cannot let the occasional blip alter its destiny with the future. India’s leadership cannot afford to let the stink of a few rotten eggs spoil the whole basket. This is not the time for a politically convenient witch- hunt.
(The author is a former President of CII and was a member of the Narasimham Committee on banking sector reforms)