Terming bank frauds as scars on the Indian economy, Finance Minister Arun Jaitley on Saturday said the business community must move towards the “habit of doing ethical business”, and warned that consequences of not following ethical practices will be a “commercial and civil death as far as their business are concerned.”
In the backdrop of Punjab National Bank detecting a Rs 11,400 crore loan fraud allegedly by diamond traders Nirav Modi and Mehul Choksi, Jaitley also expressed concerns on the bank managements, auditing systems and the supervisory agencies for not playing their roles properly.
Indicating lapses on the part of the Reserve Bank of India, he said “unfortunately in the Indian system, we politicians are accountable, the regulators are not.”
The finance minister said the government may tighten the laws to deal with people who run out of the country after defrauding banks. “The Indian businesses have to realise it has to be in the habit of doing ethical business which I think needs to be introduced. Those who deviate from that cause must always remember that the consequences will not only be commercial and civil death as far as their businesses are concerned but the law would be tightened further, if necessary, in order to find out where they are and what is the extreme action that law permits against such delinquent persons,” he said at the Global Business Summit organised by The Economic Times newspaper.
With increase in instances of willful defaulters gaming the banking system, Jaitley said the non-performing assets were a result of both business failure and diversion of funds by companies.
“Bank frauds which have now come to surface if you periodically have this kind of incidences, I think the entire effort of Ease Of Doing Business itself goes into the background and therefore these are scars on the economy which take the front seat,” he said.
Jaitley questioned both the role of the regulator and the bank management in not being able to detect the fraud.
“Ultimately if a fraud is taking place in multiple branches of banking system and you don’t have a single employee who raises a red flag doesn’t that become worrisome for the country as a whole? And similarly if you had top managements who were indifferent to what was going on, or were unaware of what was going on, you had at least multiple layers of auditing system which chose to either look the other way or do a casual job. You had inadequate supervision. Therefore I think who did what, will eventually find out in the course of investigation,” he said.
On the role of regulators, Jaitley said: “Regulators have a very important function, regulators ultimately decide the rules of the game and regulators have to have a third-eye which is to be perpetually be open. But unfortunately in the Indian system, we politicians are accountable, the regulators are not.”
Section 35, Section 35A, Section 36 and Section 36 AA of the Banking Regulation Act empower the RBI to inspect banks and their books, caution or prohibit banks in relation to transactions, scrutinise returns and statements of banks and, if required, remove the top managerial personnel working in a manner detrimental to the interests of the depositors.
The finance minister added that the Insolvency and Bankruptcy Code (IBC) was changing the lender-borrower relationship and bringing in credit discipline.
“I think a whole sea change which is undergoing is creditor-lender-borrower relationship. Because the old concept that monies once borrowed may or may not be returned. That unethical practice which existed in India I think, it is something that needs to come to an end. And today we are seeing a significant change taking place and the process which follows it now has to be extremely transparent and objective,” he said.
Jaitley said corporate insolvency resolution process under the IBC is “proving to be reasonably transparent and objective.”