PNB fraud: Govt to chase down those who cheat banking system, says Jaitley

Jaitley also questions role of auditors

Finance Minister Arun Jaitley on Tuesday blamed senior officials of public sector banks (PSBs), lenders’ auditors and the regulator for financial fraud.
 

The management at public sector banks has been found lacking in checking delinquent customers, auditors have “looked the other way”, and the regulator has to ensure that stray cases of financial fraud don’t become the norm, he said. This was Jaitley’s first public statement since the Rs 114 billion fraud at Punjab National Bank came to light.

He said the state will chase down cheaters to the end.

“The prime minister himself said at a Gyan Sangam that we want you (banks) to be autonomous, none of us is going to call you up, and, therefore, take your own decisions. When authority is given to the management, you are expected to utilise that authority effectively and in a right manner. Therefore, the question for the management itself is, was it found lacking? And on the face of it, the answer seems yes. You are found lacking when you are unable to check who among them were delinquent,” Jaitley said at event.

“What were the auditors doing? Both internal and external auditors really have looked the other way or failed to detect (frauds), where I am sure the profession of chartered accountancy itself, and those who control the discipline of the profession, will start introspecting and say what legitimate actions are to be taken,” the minister said. “And also there is an important challenge where the supervisory agencies are now, to introspect as to what are the additional mechanisms they have to put in place to ensure that stray cases do not become a pattern again.”

Senior government officials expressed surprise that the Reserve Bank of India (RBI) governor had not made a statement of assurance. “The Centre has initiated a clean-up through the insolvency and bankruptcy process. It has also taken a decision to recapitalise banks. What more can we do? External and internal checks and balances are the domain of the RBI and the banks,” said an official on Tuesday.

On Monday, the government wrote to the RBI asking if the banking regulator had detected the Punjab National Bank (PNB) fraud at any stage. The lender has been caught in a controversy after it was alleged that letters of undertaking were misused to benefit jeweller Nirav Modi. Last week, Chief Economic Advisor Arvind Subramanian said the internal audit had broken down at PNB, but asked how external audits had failed, too.

Speaking on Tuesday, Jaitley said some sections of Indian business had become used to not following ethical behavior. “Any system of banking really functions on trust. And that trust is inherent in the lender-creditor relationship. I think that relationship, in India, blurred itself out when a section, not so ethical a section perhaps, thought that it was not its responsibility to pay back.” he said.

Jaitley also defended the government’s efforts, saying that early results from the Insolvency and Bankruptcy Code were encouraging. He also termed as difficult the Centre’s decision to implement a Rs 2.1 trillion recapitalisation plan.

“That decision, as some of my friends in Parliament described, also had moral issues. Because, at the end of the day, when NPAs become unacceptably high, you expect the taxpayer really to fund what unprincipled sections of industry have been able to take out. Therefore, there is a moral hazard in this kind of solution. But there was no other option and, therefore, we had to take that difficult course,” he said.