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Mandate of Financial Action Task Force (FATF) and India’s Punjab National Bank Scam

Kiran - 

Last year, the BJP-led Indian government of Prime Minister Narendra Modi announced economic reforms, claiming that the country’s economy was in a strong position. Encouraging public investments in infrastructure, strengthening the banking systems and catalyzing private investments were key highlights of the policy. The government said that General Sales Tax (GST) had been the biggest reform along with steps like demonetisation and fight against black money.

In this regard, under the caption “Modi’s reforms have robbed India of its economic prowess,” Rahul Gandhi wrote in the Financial Times on November 8, 2018, “One year ago, Prime Minister Narendra Modi bypassed the Reserve Bank of India, locked his cabinet in a room and gave the country just four hours notice before announcing his arbitrary and unilateral demonetisation scheme. Overnight 86 per cent of the value of India’s currency was withdrawn from circulation. The prime minister claimed his decision was aimed at wiping out corruption. Twelve months on the only thing he has wiped out is confidence in our once booming economy. Demonetisation has wiped out 2 per cent of India’s gross domestic product, destroyed the informal labour sector and has wiped out many small and medium businesses. It has ruined the lives of millions of hard-working Indians. The Centre for Monitoring Indian Economy has calculated that over 1.5m people lost their jobs in the first four months of 2017 due to demonetisation.”

On the other side, India’s Punjab National Bank Scam exposed the myth of Modi’s reforms. In this respect, India’s second-largest state-run bank said on February 14, this year that it had detected fraud of almost $1.8 billion at one of its branches, sending its shares plunging more than seven per cent.

The Punjab National Bank (PNB), one of several state-owned lenders-the government was trying to clean up, said transactions worth $1.77 billion had been made for the benefit of a few select account holders with their apparent connivance. It stated that they had occurred at a single branch in India’s financial capital Mumbai.

The bank pointed out, “Based on these transactions other banks appear to have advanced money to these customers abroad…the fraud had been reported to enforcement agencies for further investigation.”

German renowned TV channel Bloomberg reported that the value of the illegal transactions amounted to eight times the bank’s net income last year.

Undoubtedly, Punjab National Bank scam has been described by the foreign media, indicating, India as a heaven for robbers and looters of National exchequer and piling the same as black money abroad, raising the question, does FATF need more evidences to put India in watch list

However, “1.8 Billion US Dollars Punjab National Bank fraud case” is being touted as the biggest-ever fraud in the banking sector in India. Punjab National Bank is second largest among India’s public sector banks.

As regards the culprits, Nirav Modi Company owned by Nirav Modi and Gitanjali group of companies owned by Mehul Choksi-maternal uncle of Nirav Modi have been identified for fraudulently robbing the bank. Reportedly, a Deputy Manager of PNB namely Gokulnath Shetty, posted at PNB’s foreign exchange department in Mumbai since March 31, 2010, is also identified as conduit/facilitator. Mr. Shetty and another PNB official Manoj Kharat fraudulently issued Letter of Undertakings (LoUs) to these firms without following prescribed procedure or making entries in the banking system, avoiding detection of transactions. While PNB did not name the other lenders, Union Bank of India, Allahabad Bank and Axis Bank, who are said to have offered credit based on LoUs issued by PNB.

Reportedly, the PNB fraud case has intensified allegation and counter allegations—a cold war between the BJP and the Congress for supporting the fraudulent companies. Interestingly, Mr. Nirav Modi was present and was part of Indian contingent at annual gathering of World Economic Forum 2018 in Davos, Switzerland.

Indian media also disclosed that “Prime Minister Office” was aware of the financial graft of Nirav Modi. Some quarters in Indian media raised questions that the family of Nirav Modi left India in the first week of January, this year, whereas, Central Bureau of Investigation (CBI) registered FIR and issued look out notice on January 31, 2018, which indicates some close links between Prime Minister Modi and Nirav Modi.

In this connection, Reuters reported, “A $2 billion fraud at India’s second-biggest state-run lender Punjab National Bank has shaken the nation’s financial sector, triggering a massive probe and regulatory changes…CBI arrests former PNB auditor M.K. Sharma, who was responsible for auditing systems and practices of the bank’s Brady House branch…gold and diamond bribes given to one PNB staffer named in fraud.”

Nevertheless, PNB fraud is not a new thing in India, as there are many businessmen absconding abroad after siphoning huge loans from Indian banks in public and private sectors.

In this context, in a written reply to a question, Indian state minister for external affairs MJ Akbar confirmed in the Lok Sabha that many businessmen had absconded after being named in scams and had settled in various countries—Vijay Mallya (Sanofi India), Jatin Mehta (Winsome GP), Lalit Modi (Godfrey Phillips India), Nirav Modi, Mehul Choksi, Ritesh Jain, Sanjay Bhandari (Arms Dealer), Nitin Jayantilal Sandesara, Chetan Jayantilal Sandesara, Dharminder Singh Anand, Ashish Jobanputra, Ms. PritiJobanputra topped the list of Enforced Department.

In a recent report of the Indian CBI, Indians had stashed more than 500 billion US Dollars foreign banks in terms of black money. And, Panama Papers leaks (2016) had mentioned more than 500 Indians found involved in money laundering through off-shore companies.

It is notable that in the banking terms, loan frauds having no prospects of recovery, as the same are termed as Non-Performing Assets (NPAs). According to the Reserve Bank of India (RBI), the gross non-performing assets in Indian banks, specifically in public sector banks, are valued at around Rs 400,000 crores (US$61.5 billion), which represents 90% of the total NPA in India, with private sector banks accounting for the remainder.

It is mentionable that India ranks fifth in a list of countries with the worst non-performing asset ratios. Portugal, Italy, Ireland and Greece–four of the PIIGS nations that suffered the most in the Eurozone sovereign debt crisis—are the only countries with higher stressed loans than India. Spain, the fifth of the PIIGS nations, has a non-performing asset ratio of 5.28%, significantly lower than India’s 9.85%.

According to the Reserve Bank of India (RBI), just 12 companies are estimated to account for 25% of the gross NPAs, and were identified for immediate bankruptcy proceedings, while there are 488 others which have been given six months time to restructure their debt or be dragged to National Company Law Tribunal (NCLT). Companies identified by RBI for immediate bankruptcy proceedings are Bhushan Steel Ltd., Lanco Infratech Ltd., Essar Steel Ltd., Bhushan Power & Steel Ltd., Alok Industries etc. Notably, a majority of these companies have political affiliations with major political parties, including the ruling party BJP and generally run their election campaigns.

It is noteworthy that Financial Action Task Force (FATF) had removed India from regular follow-up process in 2013 due to improved record of complying with organization’s recommendations.

But, based on above facts and ground realities, the case of New Delhi seems quite different. The ease with which corporate firms have been misusing the credit facilities of banks suggests that the alliances between the two are much deeper and shadowy transactions of huge quantity of money, being piled up abroad as black money are providing enough evidence for FATF to take India by horns.

We can conclude that India’s Punjab National Bank scam has exposed the myth of Modi’s reforms, especially in elimination of corruption.

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