Fraud and Crony Capitalism under the Modi regime
THE Punjab National Bank scam is the most brazen and shocking case of defrauding in the history of Indian banking. Nirav Modi, reputed to be the 85th richest Indian and his uncle, Mehul Choksi are reported to have embezzled Rs 11,400 crores through the repeated issue of fake letters of undertaking (LOUs) by colluding bank officials.
That the fraud has been going on since 2011 and peaked in the year 2017 indicates the scale and ease with which such fraud was perpetrated. Does this what “ease of doing business” amounts to in Modi’s New India?
As is the pattern established under the Modi government, Nirav Modi, his uncle and family members conveniently left the country in the first week of January, before the CBI was called in to investigate the criminal wrongdoing. The same had happened in the case of Lalit Modi and Vijay Mallya. More intriguingly, Nirav Modi appeared at the World Economic Forum at Davos in the third week of January as part of the Indian business delegation and got himself photographed with Prime Minister Modi, along with other businessmen.
The PNB scam has wider ramifications. Four other banks – SBI, Union Bank, Allahabad Bank and Axis Bank – also have exposure. It is estimated, based on data from an RTI query, that there were 8,670 cases of ‘loan fraud’ totaling Rs 612.6 billion in the past five years ending March 31, 2017.
The scam shows the severe implications of liberalisation/deregulation of the banking sector and the instructions to banks to pursue profit by any means. Banks in the recent period of rapid liberalisation have undertaken risky investments and have been tempted by the prospect of easy earnings from interest differentials, commission fees and fees for services. There has been considerable dilution of due diligence, and weakening of monitoring and supervisory systems.
Instead of holding liberalisation policies squarely responsible for the scams of the PNB type, spokespersons for neoliberal policies have predictably come out attacking bank nationalisation and PSBs. The chief economic adviser Arvind Subramanian has used the scam to argue not just for increased deregulation, but for increased ‘private sector participation.’ He has argued for majority private ownership of PSBs. The critics of PSBs rooting for privatisation would do well to take a look at the track record of private commercial banks. Since independence till 1969, 559 private commercial banks collapsed, leaving the depositors high and dry. Post nationalisation, 25 private banks that failed were rescued through merger with PSBs, including the so-called “new generation private bank”, the Global Trust Bank.
Pursuit of neoliberal policies is the root cause for the scam. The RBI inspection department has been put in mute mode. Banks and NBFCs as well as other financial institutions have been permitted to take the self certification mode, with inspections being random in theory but nominal in practice.
The logic of profit maximisation in a competitive banking environment has driven PSBs down the slippery road of risky lending and seeking income through interest margins and without due diligence.
The Modi government’s claim of a corruption free regime is now in tatters with the Nirav Modi scandal coming soon after the murky Rafale fighter deal. Both Nirav Modi and Mehul Choksi are known to be close to certain BJP leaders; in the latter case, another big businessman Anil Ambani is the beneficiary. Crony capitalism and the nexus with corrupt politicians is at the root of the non-performing assets and the banking crisis in the country.
(February 21, 2018)