Industry cautions against lending freeze in wake of Punjab National Bank fraud

NEW DELHI: Lending to corporates should not be choked as a fallout of the Rs 11,400-crore fraud at Punjab National Bank especially at a time when credit growth is about to recover and the economy set to grow at a higher pace, India Inc has cautioned.

The Indian industry called for better control systems to check financial frauds and also suggested a gradual reduction in government holding in public sector banks (PSBs).

The Confederation of Indian Industry (CII) said the government should lower its stake in PSBs to 33 percent gradually and adopt a twin strategy for tackling financial frauds, including better monitoring and supervision of banks and spread of best corporate governance standards.

"Government, regulators and industry must act fast to address systemic risks in the financial sector.

The three key solutions for the banking sector are better management and operational efficiencies, use of technology such as blockchain and big data analytics, and lowering government shareholding in public sector banks," CII President Shobana Kamineni said in a statement.

Assocham cautioned against allowing the alleged fraud in the PNB to halt the entire system of corporate lending as demoralisation would set in among the top functionaries and employees of the state-owned banks.

It is something the country can ill-afford at a time when the credit growth was about to recover and the economy was set to grow at a higher pace, Assocham said.

The CII president said financial malfeasance perpetrated by a collision of unethical business entities and corrupt officials should not lead to a situation where funds to industry get choked.

"It is time for the government to consider consolidation of PSBs and develop a few strong banks adhering to best standards in governance, accountability and transparency.

Currently, shareholdings of government have been rising with bank recapitalisation attempts, and these should be brought down to 52 percent at the earliest as intended by the government," she said.

A roadmap could be announced for bringing Government stake to 33 percent in three to four years, CII said.

Assocham Secretary General D S Rawat said while long-term solutions like privatisation of banks can be sought, the need of the hour is to rally around honest bank officers and honest business entities which have built trust on each other.

"Let one or a few black sheep not derail our financial system, which is resilient enough to withstand this kind of shocks, though ideally such jolts are better avoided and averted through systemic reforms," Rawat said.

Citing January export data that showed a deceleration in growth even as the global economy is on uptick, Assocham said the prick up in the domestic economy would require higher imports.

"Thus, both imports and exports are key to our economy and we have come a long way in scaling up the interface between the government agencies and the trade over the years.

It is time to correct the systems which had allowed the misuse and move on with the task of achieving higher economic growth," Assocham said.

The industry said there is a need to strengthen internal systems of enterprises and adherence to regulatory norms in letter and spirit.

"While we need to ensure safe and sound functioning of the system and not allow loopholes like those in the PNB system of money or guarantee transfer, let banks not over-react and hit the trade and industry," Assocham said.

As India is moving towards 'ease of doing business', the actions of a few fraudulent actors need not translate into more stringent regulatory norms for the entire industry sector when corporate governance structures are strictly followed, emphasised CII.

PNB is in troubled waters ever since it announced last week about detection of fraudulent transactions of Rs 11,400 crore from its systems by the use of unauthorised Letter of Undertakings issued by few of its employees in connivance with rich diamond jewellery designer Nirav Modi, his uncle and owner of Gitanjali Gems Mehul Choksi and associate firms to access loan from foreign branches of other Indian banks.

The authorised loan through the issuance of fake LOUs was happening since 2011, PNB has said besides registering an FIR.

A multi-probe investigation has already been launched into the matter including from the Enforcement Directorate and the CBI.