Just the other day, when I took an Uber for airport commute, I picked up a conversation with the cab driver about his saving habits.  During the course, he abruptly asked, “Sir, I have an account with Punjab National Bank.  After this Nirav Modi scam, is my money safe in the bank? I have heard rumors that PNB will start putting restrictions on withdrawals. If someday, the bank closes down, what will happen to my money.”

Over last few months, this has been a typical question being raised generally. I received calls from my clients asking for clarification about the safety of their money or their friends / relatives money kept at PNB.

The informed set of investors would want to understand the implications of FRDI Bill. FRDI stands for Financial Resolution Deposit Insurance but has become synonymous with Fear Running Deep Inside. A casual search on YouTube about FRDI will yield a generous 25-30 videos full of warning in Hindi, Telugu, Tamil and Kannada. Most videos will tell you that the crony politics, shady banking and capitalist nexus, will soon usurp your money,

Banking fiascos are not new in India or elsewhere in the west. Recent being PNB scam which jolted the nation on the whole from political class to labor class. One interesting thing about PNB in particular, which many of us may not be aware of, is that PNB was the first Indian bank to be purely funded with Indian capital during the British era. The bank, which had the privilege of maintaining accounts of Mahatma Gandhi, Jawaharlal Nehru, Lal Bahadur Shastri & many more distinguished personalities, is nowadays in the headlines for all the wrong reasons.

Bank frauds & crisis have been part of Indian financial history for as long as one remembers. Do you know the year 2017 was the 150th anniversary of failure of Presidency Bank of Bombay (PBB)?  In 1860 the British started relying hugely on Bombay cotton markets, as supplies from the USA was on decline due to the civil war. In this situation PBB began to issue loans recklessly against shares of private companies and even on just personal security. Then, as the civil war ended, the euphoria in the Indian cotton market turned to panic. These events lead to closure of the bank. Fast-forward to 20th century there were bad loan crises in 1970s, 1980s and 1990s. You name the decade, which didn’t see bank frauds one-way or another. There were stock market scams in 1992 and 2001, arising out of fraudulent banking. And now, joining in this ever-growing list of scams, are scandals like PNB-Nirav Modi, Rotomac scandal, ICICi-Axis scandal, NPA’s, etc.

One response to recent scams has been to point fingers at public sector banks, and suggest that privatization would create the right incentives. Since PSBs are at the receiving end of an enormous amount of flak on account of NPAs, it’s worth mentioning that Gross NPAs as a proportion of total loans at State Bank of India (SBI), the largest bank in India, stood at 10.35 per cent in the quarter ended December 31, 2017. At the second largest bank, the private sector, ICICI Bank, NPAs on the same date stood at 7.82 per cent, just two percentage points lower. Yet, nobody pointed out any managerial incompetence at ICICI Bank until Videcon – Nupower issue came up. We need to understand that these problems are not isolated to just public sector banks but spread across whole banking system.

There has been so much noise amidst recent scams that banking system might be going towards total breakdown. What we forget is that, Indian banks might be mismanaged and under-capitalized, but the government of India will always be firmly behind them in case of any crisis. Account holders with these banks are a massive voter class. Therefore, eventually, political prudence will prevail over fiscal prudence and the bank will be saved. So, there is no need to panic. What we really need is clarity in solving these banking flaws. Having said that, they should also be mindful that these events are getting far more common than imagined & government should work upon to make safer and efficient banking system to service the needs of a growing economy.

The needs of the hour are, better banking supervision, better reporting and better security integration. The average Indian consumer should take some solace from our country’s banking history as they have resolved fair number of scams and crises in the past. Therefore, this too shall pass !


By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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