Indian banking system needs a major makeover

Megha Choudhary
Saturday, 30 June 2018

After several cases of frauds and wilful defaulters, it is time the government brings in stringent laws to punish defaulters.

After so many frauds coming to the fore, it is evident that the public sector banks are sinking and the entire banking system needs to be restructured. Though these banks are the backbone of the economy, they are in the red thanks to the huge non-performing assets (NPAs) and scams, other factors such as loan waiver, and other government schemes linked to banks also put pressure on them resulting in them running into losses. 

The SEBI has made it clear that willful defaulters and companies which have willful defaulters as their promoters or directors cannot access capital markets to raise funds and can’t even participate in the insolvency resolution process. But the foremost question is whether such regulations will help reduce banking frauds as millionaires dupe Indian banks to the tune of thousands of crores and get away easily as in the case of liquor baron Vijay Mallya and diamond merchant Nirav Modi.

The king of good times, Vijay Mallya on Tuesday made public the letter he wrote to PM Modi and Finance Minister Arun Jaitley in 2016 expressing his desire to repay the loan and settle the matter with India’s PSU banks. However, Mallya, a willful defaulter, accused the government of not responding to his letter and said that now he has become a ‘poster boy of bank default’.

An accused in money laundering cases and Rs 9,000-crore Kingfisher Airline’s loan default case, Mallya said that politicians and media are making him a scapegoat and government investigating agencies are not allowing him to repay the loan as he had made several attempts to convince the agencies and government of his willingness to repay the amount by selling off his assets. But here the question arises as to why the liquor baron is breaking his silence now? Why did he keep mum for two long years? Had he been honest, he wouldn’t have fled the country. Hence such claims made by him are false and misguiding and just an attempt to save his image.

The making of defaulters

Multi-billion bad loans in India are growing at an alarming rate with each passing year. Vijay Mallya (fled India in 2016), Nirav Modi (January 2018) are among the few big shots who turned out to be the biggest defaulters who duped Indian banks to the tune of crores of rupees.

The total amount of the alleged fraud by diamond tycoon Nirav Modi was estimated at total $1.8 bn. The fraud rocked the country’s second largest state-owned bank – the Punjab National Bank in February this year.

According to the Finance Ministry data released last year, between the years 2012-2013 and 2016-2017, banks saw a total number of 22,949 instances of fraud, with total losses to banks amounting to $10.8bn and worst hit are state-owned banks and PSUs. 

With so many banking frauds coming to the fore, the country’s banking system is sort of paralysed.

To keep these banks going, the government has to regularly keep injecting capital into them. But from where does this capital come? Isn’t it the money of honest taxpayers of the country? A common man has to pay taxes for almost every service or commodity he uses, every item he buys and the bank defaulters get away easily stacking their money abroad to live a lavish life after fleeing the country. 

But how do these frauds take place and how do the defaulters manage to flee the country? Loopholes in our banking system can be attributed to this mess. Political pressure forces banks to lend money without calculating the risk and because of this, the state-owned banks have become money losers. 

Vijay Mallya and Nirav Modi, who come under ‘willful defaulters’ are leading a luxurious life abroad. But what about the small borrowers for instance farmers? Unable to clear their debts, poor farmers choose to end their lives while the big fish manages to escape easily. This clearly indicates that there are several loopholes in country’s banking system which need to be identified and rectified.

Stringent laws the need of the hour

After several cases of frauds, the Finance Minister had issued notifications to all PSU banks to post names and pictures of willful defaulters on the banks’ website to shame them, but will this serve the purpose? It is time the government brings in stringent laws to punish defaulters. Extradition process of defaulters needs to be speeded up for a speedy trial. Those hand-in-glove with such defaulters whether a powerful politician or a bank official, should not be let scot-free. Banks should strictly implement the RBI guidelines to tighten the noose against such defaulters failing which the responsible authority should be dealt with strictly.

Who is a willful defaulter?

A willful defaulter is an entity or a person that has not paid the loan back despite the ability to repay it. Deliberate non-payment of the dues despite adequate cash flow and good net worth; siphoning off of funds to the detriment of the defaulting unit; assets and proceeds have been misutilised; misrepresentation/ falsification of records; disposal/ removal of securities without bank’s knowledge and fraudulent transactions by the borrower.

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