Raghuram Rajan explains the main reason Indian banks can't prevent frauds

Former RBI Governor Raghuram Rajan on Wednesday said that some of the banks in India have antiquated systems that are not adequate to stop rogue people from committing fraud. He said that a part of the Punjab National Bank scam was cyber-related and there is a need to go into the details of how the fraud came to be. "It turns out that we don't need to be really clever in the Indian system to make away with a billion dollars. Some of these banks have antiquated systems also....Your worry is that the systems are not adequate to prevent rogue dealers, rogue employees colluding and making off with stuff. That is the fraud part," he said.

Earlier in February, the Punjab National Bank detected fraudulent transactions of Rs 11, 400 crore at a Mumbai branch. It named two bank officials who had bypassed the bank's core banking system to issue fake Letters of Undertaking (LoU)s to billionaire jewellers Nirav Modi and his uncle Mehul Choksi.  

The former RBI Chief also talked about two major reforms - GST and Demonetisation - that the government carried out recently. On GST, he said that the proper implementation of the newly-introduced GST can be worked upon and is not an unfixable problem. Rajan was responding to a question about the shoddy implementation GST. He said: "On the Goods and Services Tax, we will figure it out eventually. It will be nice if we could implement much better than we do. But it's (GST) not an unfixable problem. We can work on it. I wouldn't give up hope at this point on that." The government rolled out GST last year in July, but traders and business enterprises have been complaining about the poor infrastructures that were needed to carry out this reform.  

Talking about demonetisation, Rajan said that it was not a well-planned, well thought-out, useful exercise and I told the government that when the idea was first mooted. "India went into it without having done that. It had a negative economic impact but also the idea was that somehow people who had money stored in their basements without having paid taxes on it would overnight see religion and come to the government and say 'sorry we were hiding this stuff, let me pay taxes on it'," Rajan said.

The former RBI Chief said this while delivering the 2018 Albert H Gordon Lecture on the topic 'Leverage, Financial Crises, and Policies to Raise Economic Growth at the Harvard Kennedy School in Cambridge on Wednesday.

"Anybody who knows India, knows that very quickly we find ways around the system ," he said, adding that with essentially all the money that was demonetised coming back into the system, the exercise did not have the direct effect that was sought. "There may be some longer term impact that people think that if this sort of thing happens then the government is serious about collecting taxes. There may be greater tax payments but we still have to see strong evidence that that is true," he said.

Rajan also expressed concern that a lot of people probably lost their jobs due to demonetisation but that has not been counted well as it would be mostly in the informal sector. "The positive impacts (of demonetisation) are out there in the future. We have no idea whether they will be important. To my mind it was not a policy that was useful at that time," he said.

To a suggestion that demonetisation could have positively impacted growth, Rajan said "you would have to find a new economic theory to explain how it helped the economy and it would be a really die-hard government advocate who would say that the growth benefits of demonetisation were immediate." He further said: "Most of the supporters of the move would say that the benefits of the move are coming by changing the incentive to pay taxes. I would say yes, we will have to wait and see whether that in fact is true."