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Here’s why booking CAs and lawyers for bank frauds may not be enough
Photo Credit: Reuters

Punjab National Bank (PNB), which suffered the ignominy of reporting India’s biggest bank fraud, plans to go on the offensive against lawyers and chartered accountants if they collude with borrowers to cheat the lender. It would do well to tighten its defences first.

The state-run lender had reported a fraud that totals more than $2.1 billion in February and March, accusing diamond merchant Nirav Modi and his uncle Mehul Choksi of duping the bank. While investigations into the fraud and search for Modi and Choksi are still going on, PNB is now reportedly looking to name third parties—lawyers, CAs and valuers—in first information reports with law enforcement agencies, if they have colluded with the borrower in a fraud.

A report in The Economic Times newspaper on Monday said the bank issued an advisory to this effect on 14 June after reports of fictitious income tax returns, false address proofs and fake title deeds. Thus far, banks had merely

blacklisted such third-party individuals and firms, and not taken any penal action against them.

The intention behind the move seems to be right. Indian banks, especially state-run lenders, have good reason to worry as their bad loans have breached Rs 10 trillion with no end in sight to the burgeoning problem.

But, as the demonetisation experiment taught us, intentions alone are not enough.

It will be tough for PNB to make any strong legal case against the lawyers, CAs or valuers of the defaulters or the fraudsters unless it can prove complicity.

Moreover, while it is understandable that banks are now looking to go after not just the culprits but also their accomplices, it may be a case of trying to close the stable door after the horse has bolted.

That the government has been unable to stem the rot in its banking system is patently clear from the fact that the cancer of bad loans seems to be spreading wider. As a VCCircle analysis in May showed, the quarterly losses of state-run banks quadrupled in the last three months of 2017-18, compared with the previous quarter, with PNB and State Bank of India declaring losses of the order of Rs 13,400 crore and Rs 7,700 crore, respectively.

But that’s not where the story ends. PNB and SBI saw bad loans swell by more than Rs 29,000 crore and Rs 24,000 crore, respectively, during the January-March quarter.

All this points to a larger malaise—that the quality of loans being given out may not be very good. This, essentially, means there are shortfalls in the practices and due diligence banks do before sanctioning a loan.

In fact, the Reserve Bank of India has flashed similar concerns in its bi-annual Financial Stability Reports. Moreover, not only do India’s banks have significant exposures to the telecom and power sectors, which could go bad in coming months, they are also increasingly giving out riskier retail loans while cutting back on corporate loans. As an Asia Times report points out, the proportion of loans to retail customers jumped to 48.7% in 2017-18 from 5.3% in 2009-10.

So, while it may be a good idea to book lawyers, CAs and valuers who help unscrupulous borrowers window-dress their books, banks may first want to look at their own lending mechanisms, and try and stem the rot within.

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