The investigation by the Enforcement Directorate and the CBI into forex remittances in the Bank of Baroda (BoB) case is yet another reminder of lax governance in public sector banks (PSBs). Six people have been arrested, and the scam is said to involve money laundering of about Rs 6,000 crore. BoB employees from one branch in north Delhi allegedly colluded with middlemen to create at least 15 fake companies to swindle money. Each transaction was kept below $1,00,000 to avoid observing guidelines requiring intimation to the RBI. What apparently triggered the probe was the number of transactions from a single branch. As the probe continues, more details may emerge — 59 suspicious accounts are being scanned — and the involvement of other branches and banks cannot be ruled out.
While this is the latest episode of alleged corruption in a PSB, it is not the only one. It would be a mistake, moreover, to see these cases as the result of individual greed. They reflect a systemic failure. PSBs have been under the scanner for widespread inefficiencies and corruption, and the P.J. Nayak Committee report of May 2014 details many of the sector’s endemic problems. However, despite several public pronouncements, the government lags behind on PSB reform.
Inadequate governance in PSBs has severely compromised their financial health, threatening to drain the public exchequer. The level of non-performing assets, a direct result of the lack of due diligence on the part of the bank, has reached such a point that Rs 3.6 lakh crore would be required to recapitalise the PSBs over the next three years. The root of the problem, laid out in worrying detail in Chapter 3 of the Nayak report, is the way bank boards are constituted and run. Board members are political appointees — disempowered and lacking any skill in banking — and the trail of inefficiency cascades downwards. The Nayak report recommended a three-phase reform of bank boards, calling on the government to separate ownership from the day-to-day management of the banks.
The Centre seems cognisant of the challenge. In January, during a bankers’ retreat in Pune, the prime minister promised that political interference in the functioning of banks would be curtailed. In August, the finance minister launched Indradhanush — a seven-pronged plan to revamp the functioning of PSBs. However, the government’s roadmap and its limited implementation have failed to inspire confidence. For the most part, instead of initiating structural changes, as suggested by the Nayak report, the government has chosen to do what appeared most convenient. It is not surprising, then, that the bad news keeps rolling in.