Indian Banks: Broken Windows and Musical Chairs

It is easier to summarise what is right with Indian banks than to detail what is wrong . Tragically, nothing seems to be right. SBI, BOB, PNB, Allahabad Bank, IOB, etc., all of them seem to be neck-deep in mismanagement and consequent ill-effects.

SBI has started reporting quarterly loss. BOB has closed its branch in South Africa. PNB has been forced to go to town regarding its incapacity to comply with basic banking requirements. Allahabad Bank is a participant in all big bad loans. IOB is in perennial penury. Banks not named here are perhaps waiting for an opportune time to disclose their distress.

When the entire system is rotten, neither RBI nor the Finance Ministry can escape their responsibility. We do not have a responsible and reasonable opposition party that can pin  down the government for its lapses and facilitate remedial steps. In essence, the entire banking system is broken.

According to the theory of Broken Windows, if even a single window is broken in a house, over time,  vandalism can be expected. If all windows are broken?

Frauds are committed over a long period of time as in the case of Nirav Modi. Instead of rounding up all perpetrators, we catch only those who are at the wheel when the fraud becomes public. In this game of musical chairs, the borrowers are able to fly the coop because they are informed in advance as to when the music will stop.

It has become the norm for every bank whose mismanagement is exposed,  just to brazen it out till another bank gets into limelight for its recklessness. It is a never-ending saga of managerial delinquency and competitive chicanery.

Ponzi scheme in loan frauds

Normally, Ponzi schemes happen in mobilisation of deposits. Sometimes, banks evergreen their loan accounts by sanctioning higher amounts to defaulting borrowers. PNB has now raced far ahead of other banks in running a Ponzi in fraudulent loan accounts.

The Ponzi is supposed to have started in the year 2011 and the balloon burst in 2018. For seven long years, unauthorised SWIFT messages emanated from the Brady House, Mumbai Fort branch of PNB. Each message guaranteed higher amount of buyer's credit than the previous message. This bank was the topper among all Indian banks in reporting total quantum of frauds in 2017. But, in the number of frauds, it is not even in the first five. The bank and its employees really think big!

PNB is the only bank in India where the Chairman and Managing Director have the same name, Sunil Mehta. This coincidence, of course, means nothing. But these days, the bank's SWIFT messages also mean nothing. They are unauthorised.

PNB has spawned a few innovations. Loan applicants have the option to ask for loans via CBS or CBS-sidestepped loans. In grand old days, banks used to boast that they had secret Reserves and therefore, their financial position was stronger than what was suggested by their Balance Sheet. Now, PNB has come up with secret loans!

P.Chidambaram keeps saying that credit offtake is poor indicating that GDP is stagnant. He is wrong. He has not taken into account secret loans.

Yesterday I was getting introduced to a stranger. When I told him that I had worked in PNB, he withdrew hastily.

PNB's uniqueness

I worked in Punjab National Bank for 21 years. It is not surprising therefore that any news about PNB interests me. It is the only bank in India whose Chairman and CEO (Managing Director) both have the same name: Sunil Mehta. This peculiarity may occur in family-owned companies. This does not seem to be the case in any non-family owned company in India.

The Chairman had earlier worked with Citibank and AIG. The MD came to PNB via Allahabad Bank and Corporation Bank. Placing both of them in the same bank is an interesting experiment.

PNB which was once considered a robust bank has fallen on difficult days. It has skipped dividend for the past two years. It's anybody's guess when its fortunes will revive.