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Neglect of 1992 scam led to Mallya, Modi frauds

March 07, 2018 09:24 IST

'The Modi government has been taking credit for improvement in respect of the ease of doing business in India.'
'But when I look at the scams I cannot help feeling that it is too easy to do business with banks in India, if one is a Harshad Mehta, Vijay Mallya or Nirav Modi and their tribe,' says former Union home secretary Madhav Godbole.

Nirav Modi
Illustration: Dominic Xavier/Rediff.com

Close on the heels of the Vijay Mallya scam involving a number of major banks, including the country's biggest bank, the State Bank of India, and the Industrial Development Bank of India, the country is rocked by another mega scam.

This time it is in respect to the second biggest bank in the country, the Punjab National bank.

In reply to a question in the Lok Sabha, the government stated that during the four financial years 2013 to 2017, there were as many as 8,636 frauds in public sector and private sector banks in which an amount of Rs 26,922 crore was involved.

 

This should make anyone lose sleep. But, unfortunately, this does not hold good in respect to those in power! Something is certainly rotten in the state of Denmark.

There was the usual cacophony in the electronic media when the news broke. The blame game was about whether the previous United Progressive Alliance government should be held responsible for the lapses or whether it is the Bharatiya Janata Party-led government which is remiss.

This in fact has become the standard pattern whenever the country is rocked by major scandals. Demands are also being made that a Joint Parliamentary Committee should be appointed to go into the PNB scam.

Public memory is short and it is getting even shorter. Therefore, it might be worthwhile to recapitulate the experience of the JPC on the last bank scam in 1992.

Soon after the economic reforms were launched in 1991, the buoyancy in the stock market was mistaken as evidence of the success of economic reforms and its reception by the corporate world.

As a result, the ministry of finance as also the Reserve Bank of India failed to see that bank funds were being clandestinely used in the stock market by unscrupulous brokers.

There was an uproar in Parliament and the then finance minister Manmohan Singh, made a very uncalled for comment by saying, 'But that does not mean that I should lose my sleep simply because the stock market goes up one day and falls next day.'

This, in a sense, conveyed the approach of the government to the scam.

The JPC spent a lot of time in collecting information and literally truckloads of documents. It also made some very perceptive and penetrating observations on the functioning of the government, the supervisory role discharged by RBI and several lacunae in it.

Referring to the then finance minister's flippant comment, the JPC sarcastically noted: 'It is good to have a FM who does not lose his sleep easily but one would wish that when such cataclysmic changes take place all around, some alarm would ring to disturb his slumber.'

The JPC had recommended: 'The Comptroller and Auditor General (C&AG) may be given a year's time to arrange for placement of staff in position and their training before starting on supplementary audit of all nationalised banks and financial institutions.'

'Alternatively, the C&AG can take up the audit of all government banks and financial institutions in phases covering all of them within a period of two years from the date the necessary legal framework is created.'

The committee's observations and recommendations should have led to a number of important decisions pertaining to the supervision of the banking system, both by the ministry of finance and the RBI.

Unfortunately, this did not happen.

In fact, some officers against whom the committee had made severe criticism flourished in subsequent years.

Reference must also be made to yet another distinct feature of the functioning of the JPC. To give an impression that the committee's report was unanimous, the notes appended by a number of members were merely called 'notes' and not 'dissenting notes'.

For example, in the note submitted by a number of members including Jaswant Singh, George Fernandes, S Jaipal Reddy, Gurudas Dasgupta and others, it was urged that certain matters must also be examined by Parliament (as the committee had not done so) when considering the report of the committee: Allegations relating to payment of Rs 1 crore by Harshad Mehta (to then prime minister P V Narasimha Rao); matters relating to the conduct of Romesh Bhandari, then the governor of Tripura etc.

Several other issues were similarly raised in the notes submitted by some other members.

As for the large amounts involved in the scam all that the committee said was that these matters should be further investigated by the concerned government agencies.

It was not therefore surprising that Debashish Basu and Sucheta Dalal, the two journalists who had done commendable investigative work on the scam have noted in their book, The Scam -- Who Won, Who Lost, Who Got Away: 'It was bad enough that gigantic scam took place. It is as incredible how ham-handed the scam investigation has been.'

In the meeting of bank chairmen called by the then finance minister, Manmohan Singh had said, 'It was a collective failure of the banking system.'

Another term which was repeatedly used by government functionaries while talking about the scam was that it was a 'systemic failure'. As if for this collective or systemic failure no one could be held responsible.

The Action Taken Report submitted by the government to Parliament in July 1994 reflected this thinking and the Opposition parties boycotted Parliament for 16 days in July-August 1994.

The two recent major scams involving Vijay Mallya and Nirav Modi are a glaring proof of the neglect of the first bank scam.

It is against this background that one must ask a question whether appointing another JPC would serve any purpose, except that of window dressing.

If the intention is to take serious remedial measures, I would suggest that a high level judicial commission of enquiry should be appointed under the Commission of Enquiry Act.

The commission should be asked to hold a wide ranging enquiry concerning all aspects of the frauds perpetrated in the public and private sector banks.

It should also be requested to go into the functioning of the ministry of finance and the RBI over the years.

The commission could also examine whether the instrument of Letter of Understanding (LOU), introduced by the RBI, needs to be continued in such an unguided and unrestricted manner.

While appointing such a commission, the government should make a categorical announcement that the report of the commission would be published as soon as it is submitted to the government, without waiting for preparation of the ATR, and follow up action on the recommendations be taken expeditiously, within one year at the latest.

One issue which has come up time and again whenever banks have run into difficulties or have got involved in frauds is that of efficacy of the audit, whether the audit is by the statutory auditors or the RBI.

In most of these cases, it is not in public knowledge if any action was taken against the auditors for the lapses in the audit.

Action against the auditors is expected to be taken by the apex body of the auditors.

Over the years it is seen that apex bodies of several professions such as engineers, auditors, architects, advocates and so on, which are empowered under the relevant Acts of Parliament, have been remiss in discharging their responsibilities. This has led to a feeling of frustration and helplessness among the people.

In my book, Good Governance Never On India's Radar, I had advocated that Ombudspersons should be appointed for these professionals and their apex bodies. Such an effective grievance redressal mechanism will act as a valve in relieving pressures of discontent.

Transparent functioning of the Ombudsperson and her/his passing self-contained 'speaking orders' will go a long way in empowering citizens.

Finally, the truth, howsoever unpalatable it may be, must be faced. Bank nationalisation was undertaken by Indira Gandhi for purely political reasons and she made no secret of it when she spoke to I G Patel, the then secretary, economic affairs, ministry of finance, with instructions for taking follow up action.

The merits of the proposal were never examined before taking the decision. And neither have they been during the last five decades since nationalisation of banks.

A comprehensive study should now be undertaken to examine the extent to which these banks have fulfilled the objectives with which they were nationalised.

This flagship programme of the then avowedly socialist regime has been exploited fully by the ruling elite, whichever political party was in power.

The nexus between politicians, industrialists, large borrowers and bankers is legion in India. Crony capitalism has been in evidence all these years.

Nationalised banks have certainly served some purpose in terms of mobilisation of deposits, particularly from rural and semi urban areas. But the credit delivery system of public sector banks in these areas has not been particularly effective or economical.

In fact, much greater responsibility in this regard is borne by the co-operative sector. The banks have been totally bureaucratised and politicised. The time has therefore come to seriously consider privatisation of these banks in a time-bound manner.

I hope the Narendra D Modi government will set the ball rolling without any loss of time.

Taking effective remedial steps to ensure good health and credibility of the banking system is crucial to fulfilling India's ambitions as a rising power.

The latest report of Transparency International on the global corruption perception index continues to make a bleak reading so far as India is concerned.

India ranks 81 among 180 countries which is depressing. The World Bank's global investment competitiveness report 2017-2018 underlines the concept of government effectiveness.

It is an aggregate indicator that reflects, among others, perceptions of the quality of public services, the quality of civil service and the degree of its independence from political pressures, and the credibility of the government's commitment to its policies.

Gigantic bank scams in the recent years have clearly established the ineffectiveness of the government. The Modi government has been taking credit for improvement in respect of the ease of doing business in India.

But when I look at the scams I cannot help feeling that it is too easy to do business with banks in India, if one is a Harshad Mehta, Vijay Mallya or Nirav Modi and their tribe.

Madhav Godbole is a former Union home Secretary and secretary Justice, Government of India.

Madhav Godbole