Rajya Sabha MP Rajeev Chandrasekhar has been raising the issue of widespread fraud and corruption in the banking system since the UPA period. He raised the issue inside Parliament and outside, and wrote letters to the UPA government, suggesting ways to curb the menace.

However, the then UPA government ignored his warnings. In an interview to The Sunday Guardian, Chandrasekhar says that the Punjab National Bank (PNB) fraud case is a failure of the management and auditors. The NDA MP warns that the banking sector urgently needs better systems as well as better managers with better compensation. Excerpts:

Q: Do you think it is a systemic failure which could have been detected by the concurrent or internal auditors?

A: Of course, it is a failure of the management and auditors. PNB is India’s second largest public sector bank. It has a long history. It is tragic that such a vital bank that navigated tough times in our history is being felled by a combination of corrupt clients, officers and a mysterious lack of oversight and audit.

Q: You had warned the government about the troubles in the banking system. Did the government pay heed to your warnings and take corrective measures? What was their response to your warnings?

A: I raised issues of widespread fraud and corruption in public sector banks repeatedly in 2011 and 2012. Around the same time, I was the first MP to also flag the growing trend of NPAs. On both these issues that were core to the integrity and stability of our banking system, the then UPA government’s responses were bland and remarkably non-urgent and casual. The results of that are there for us to see, with our banking system’s credibility and stability being rocked by NPAs and frauds.

Q: How much is the RBI responsible for this, since the Central bank is supposed to carry out inspections of the audits?

A: One of the points I have repeatedly raised—in Parliament and in the media and other fora—is the lack of discussion about accountability of the RBI governor when these problems were growing. You may ask why. The RBI is the banking sector regulator and its role in both these huge hits to our banks i.e. NPAs and frauds, must be studied. What were RBI Governors Subba Rao and Raghuram Rajan doing or not doing? Who in the RBI was negligent to these two ticking time bombs?

Q: Do you think more checks and balances are required to ensure that such incidents do not take place in future? Do you think India needs more robust risk management system?

A: The phrase checks and balances implies that some new solution is required. Banking in India is not a new industry. Many of these banks are decades old. The banks, their boards and managements, must function like normal risk and credit managers. Instead, as was rampant throughout the UPA, bank boards are full of crooks or “friendly” directors for whom the interests of the banks are the furthest thing—reducing these banks to “piggybanks” for politically connected. The issue is simple: government-owned banks are vulnerable to political crony lending and also corruption at operating levels. This needs to be fixed. The NDA has fixed boards and senior management issues, but has underestimated the corruption done at the operating levels of these banks.

Q: Do you think the PNB scam will erode the confidence of the common man and also the foreign investors in the Indian banking system?

A: Yes, frauds can’t be good for the confidence of the investor or the depositor. Sometimes, there is a run on the bank caused by frauds such as this. Fortunately, for depositors, the taxpayers backstop the bank. Unfortunately for taxpayers, because they backstop the bank, they pay the bill of this fraud.

Q: What should be the role of the government to prevent such cases in future?

A: The government should seriously consider revamping management the models of these banks. Better systems, better managers with better compensation are needed. Listing all public sector banks and expanding capital by bringing in more public and strategic shareholders will also free banks from political and babus’ influence on their work culture and ethics. There must be a way forward to transform our public sector banks. The Narendra Modi government has made some good changes, but more needs to be done.

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