India's $1.8bn jewellery scandal is down to risk management failure, former banker says

Government issued 15-day timeline for public sector banks to clean-up their act following PNB fraud

Abu Dhabi, United Arab Emirates - February 28th, 2018: Arundhati Bhattacharya at the Global Financial Market Forum. Wednesday, February 28th, 2018. Emirates Palace, Abu Dhabi. Chris Whiteoak / The National
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India's $1.8 bilion fraud case at the state-run Punjab National Bank allegedly perpetrated by celebrity jeweller Nirav Modi is likely to be the result of a “failure of operational risk management", the former chairwoman of the country's largest public lender said.

Mr Modi, who designed jewellery for the biggest names in Indian film industry and Hollywood, has fled India following allegations of fraudulent transactions over seven years in what is now being called the country's biggest banking scandal. On Tuesday, the Indian government issued a 15-day ultimatum for public sector banks to tidy up their operational and technical risk management systems.

Arundhati Bhattacharya, who headed the State Bank of India until her retirement last year, observed that the timeline should be sufficient for banks to clean up their act had they maintained strict compliance regimes before.

"I dont think this should be done on a one off basis, I feel that at least, in my own bank, it is an ongoing activity, it is not something that you can wake up one day and start doing,” she said.

"If it's an ongoing activity 15 days should be fine, if it's not an ongoing activity then that should be a separate case, but what the government is trying to say is 'Go through it again, and see if there are any gaps that you could have missed."

The move comes amid calls that Indian public sector banks, except the State Bank of India, be privatised following a steady accumulation of bad loans over the years. .

India, Asia's third largest economy ranked fifth globally for bad loans, with 7.33 lakh crore rupees ($180bn) unpaid as of June last year, according to Mumbai-based ratings agency CARE. India, which was poised for double-digit growth in the late 2000s, has been saddled with rising volumes of non-performing assets, including the country’s state-owned carrier Air India, making banks increasingly wary of lending to big entities.

The build-up of bad loans in India coincided with the country’s growth, which peaked at 8.5 per cent in 2010 only to halve to around 4.5 per cent in the fiscal year 2013-14.

During the end of the last decade, when India was seemingly poised for double-digit growth saw a frenzy of large-scale infrastructure projects, the capacities of which could not be fully utilised once the growth rates became more modest.

"The capacity build-up during this period couldn’t really get used. If you’ve got capacity built-up, it means you’ve got capital infrastructure and you’re paying interest on the same and when you don’t have the utilisation of that capacity, it’s going to results in NPAs [non-performing loans],” she said.

However, Ms Bhattacharya is hopeful that the utilisation of capacity of mega-projects in India will pick up following what she sees are positive reforms such as implementation of demonetisation and goods and services tax by the current Narendra Modi government.

A stricter compliance regime against bad loans has revived flagging volumes of lending, noted Ms Bhattacharya.

Indian credit growth picked up last December to a 15-month high on the back of surging demand for both corporate and retail loans. Bank credit rose by 10 per cent in December compared with a 4 per cent increase for the same period in 2016, according to the country’s central bank.

Lending to large corporates increased 2.1 per cent in December, against a contraction of 4.3 per cent for the same period in 2016, with loans to textiles, petrochemicals engineering, food processing and construction showing marked increases.