Public sector bank stocks have plummeted a massive 12% since the PNB fraud came to light. Graphic: Naveen Kumar Saini/Mint
Public sector banks will now have to look back on every defaulter above Rs50 crore and check whether he was genuinely stressed or just fooling them. In doing so, they may also have to check whether their own employees were on the take and colluded with the defaulter for kickbacks.
Financial services secretary Rajeev Kumar tweeted on Tuesday that the government wants the lenders to dig for indiscretions on every defaulted loan above Rs50 crore. In cases where fraudulent transactions are found, the government wants bankers to involve investigating agencies like the Enforcement Directorate and their ilk.
This puts the approximately Rs8 trillion worth of bad loan stockpile of the banking sector in the spotlight. Nevertheless, the government’s new direction, which comes in the wake of the $1.8 billion PNB fraud, is not new as banks have already been furnishing the data to the Reserve Bank of India (RBI).
The central bank in July 2015 had put in place a framework to identify and provide for fraudulent loans early on before it blindsided them, irrespective of the loan size. The circular contained exhaustive instructions on how a bank can identify a loan fraud and report the same to RBI as well as the investigative agencies. It also instructed banks to initiate proceedings on their own employees if they were found to be involved in the fraud.
So what is significant about Kumar’s tweet?
One is the timing, since it comes at a time when two banks are embroiled in fraudulent transactions and have cast doubts on the governance and risk management practices at all public sector lenders.
Secondly, the government has put a number to the size of the loan—Rs50 crore and has also given a deadline to bankers.
Third, it has woken up to the fact that it can exercise its rights as owner and the sovereign to examine what goes on in its own firms. Given that the government has to be seen addressing the problem head on, the best way to show it is to dust old rule books and find out whether they were being followed.
Importantly, this puts a question mark on what the regulator was doing with the fraud loan data that banks were said to be diligently reporting to it. Public sector bankers are scared enough to report even the slightest fraudulent behaviour to the authorities lest it hits them in the face later on. Their fear of investigative agencies poking into every decision with the benefit of twenty-twenty hindsight is well known.
What will this renewed spotlight on frauds, and the framework to find and fix them do?
To an extent, it amplifies the fear among lenders on what will be construed as fraud. Will they be pulled up for giving leeway to a borrower on repayment knowing that his disbursements and end-use of the disbursals differ at times? Will they be suspended or their pension withheld until they give a satisfactory explanation on their involvement in a fraudulent case? Will the investigators presume mala fide intentions even in the case of genuine mistakes? Will bankers be presumed guilty until they can prove their innocence?
At stake is the credibility of hundreds of retired employees and existing bank staffers involved in the process of granting and disbursing loans. The directive could have a chilling effect on lending by public sector bankers, not least because the priority is now likely to shift to unearthing fraud. The pressure on understaffed investigative agencies is also likely to be severe.
What is also at stake is the trust of investors in these lenders. What will be dug out as a result of this exercise is a big uncertainty that will weigh on public sector bank stocks now. They are already beaten down with most of them trading below their book value. These stocks have plummeted a massive 12% ever since the PNB fraud came to light. But such open ended and widespread investigations could very well lead investors to flog them down further.
