RBI should ensure that PNB scam doesn't 'paralyse' financial system: Ficci

Ficci prez Rahesh Shah said, "We have to overcome the fear psychosis. The investigation should not result in fear psychosis."

The government and the Reserve Bank of India should make sure that the Rs 127 billion PNB scam does not lead to a "fear psychosis" in the financial system which chills economic activity in the country, a prominent industry lobby has said.

The emergence of the scam should not lead to a "paralysis" and "fear psychosis", Rashesh Shah, the president of Ficci, told PTI here.

Shah, who also chairs the diversified financial services company Edelweiss, said he has written to both the RBI and the government with a request to ensure that the country does not slip into that zone.
 

On whether the emergence of the Punjab National Bank scam, allegedly involving diamond trader Nirav Modi, is a throwback to the latter part of the UPA-II regime, where the fear of the 3Cs CBI, CAG and CVC led to a chill in activity, Shah said, "We have to overcome the fear psychosis. Investigation should not result in fear psychosis."

He, however, answered in the negative when asked if scams involving Nirav Modi or the over Rs 35 billion fraud involving Rotomac Pens' promoter are akin to the emergence of corruption allegations faced by the Manmohan Singh government in its final years.

Speaking to PTI, a top official from one of the few lenders not having any exposure to the companies promoted by Nirav Modi or his uncle Mehul Choksi of Gitanjali Gems, said the scam has come as a "shocker" which will "definitely have short term impacts" through a slowdown in lending.

A media report on Saturday said banks, especially the state-run ones, have turned defensive when it comes to lending during what is otherwise a "busy season".

The report quoted an unnamed official as saying that lenders do not have the time to go through loan proposals and disbursals have slid down in the list of priorities for bankers.

Shah called the risk adjustment that has either resulted in a chill to fresh lending or upped the borrowing costs, as a shift to risk aversion and maintained that this will be temporary.

He said it will take up to six months for the system to stabilise.

"The fact that it could continue for as long as it did, that is what is the more worrisome part," the banker quoted earlier said, adding that periodic reviews seem to have glossed over the discrepancies.

Shah said emergence of frauds like these should make the banking system stronger, and cited earlier instances like the Harshad Mehta scam in 1992 and the Ketan Parekh scam in 2001 where the system responded by strengthening itself.

"Overall I think we should use this to make the system stronger rather than create a fear psychosis," he said.

Asserting that not all non-performing assets (NPAs) are the result of fraudulent activities, Shah said the emergence of frauds has helped classify NPAs into three broad categories - first, where there is a genuine reason for assets turning sour, second is because of the promoters mistakes, and third, where there is an outright fraud.

Asked if the emergence of the PNB scam will have an adverse impact on public sentiments and if it will influence the general elections, he said newer issues keep cropping in politics but stronger governance processes that come about will be a positive.

Meanwhile, on the progress of the National Company Law Tribunal (NCLT), Shah said the biggest challenge to the mechanism is the "frivolous appeals", and requested companies to desist from the same.