BJP ‘Cannot Escape Responsibility,’ Says Yashwant Sinha On PNB Fraud

The Smarter way to get your business news - Subscribe to BloombergQuint on WhatsApp

The government of the day cannot shirk the responsibility for the Punjab National Bank fraud, according to former Finance Minister Yashwant Sinha.

"We cannot escape the responsibility that this scam took place when we have been in office for the last four years. It might have started earlier but why was it allowed to continue?" Sinha told BloombergQuint in an interview.

The Bharatiya Janata Party leader, who has been a vocal critic of the Narendra Modi government, said that "truth had become a casualty’ in the political fight between the Congress and the BJP over the fraud.

On Feb. 14, India’s second largest state-owned lender disclosed that it had detected a $1.77 billion (around Rs 11,300 crore) scam, linked to fraudulent ‘Letters of Understanding’ being issued via the lender. Investigative agencies have arrested twelve officials from PNB as well as companies owned by the accused - Nirav Modi and his uncle Mehul Choksi, since investigations started. But Sinha said a fraud of this magnitude is unlikely to have been carried out only by employees.

"This would not have happened without the involvement of the highest levels in the system. When I am talking about highest in the system, I am not excluding the political class from it." - Yashwat Sinha, Former Finance Minister

He added that an independent Supreme Court-monitored inquiry was essential to ensure that the those involved are punished. Sinha also said that while the banking system "lost much of its sheen" due to the fraud, he wouldn't advocate privatising government-owned banks.

"I would not agree with the thesis that privatisation is a panacea for all the ills. We know that private sector banks have also been swindled and have indulged in fraud." - Yashwat Sinha, Former Finance Minister

Industry body Assocham and industrialists including Godrej Industries Ltd. Chairman Adi Godrej have called for the government to sell its majority control in public sector banks in the wake of the PNB fraud.

Watch the full conversation here:

Here are edited excerpts from the conversation:

Congress says that Finance Minister Arun Jaitley and Prime Minister Modi are personally culpable for the PNB fraud, while BJP sounds like it was the Congress Party that pushed PNB managers to give loans to Nirav Modi in 2011. Does the truth lie somewhere in the middle?

At this stage, nobody knows what the truth is. Because in this political slugfest, it is the truth which has become a casualty. The point is, if the scam had started in 2011, then we should have had a clear picture by now as to how many LoUs were issued between 2011 and May 2014, when the UPA was in power. We should know how many LoUs, involving what quantum of funds, were issued after May 2014. This would clearly indicate the involvement, if at all, of the two governments.

For the Congress to say that the Finance Minister and Prime Minister are personally involved, is completely erroneous because no Prime Minister or Finance Minister would ever be able to supervise the day-to-day functioning of a bank or any other institution under his control. However, the fact remains that the Prime Minister and Finance Minister are responsible constitutionally for whatever happens under their charge.

Therefore, as far as the Parliament and democracy are concerned, it is the government of the day and the minister in charge who is answerable to the people of the country.

At the end of the day, an investigation alone will establish whether anyone was personally involved at the political level or not, either in the earlier regime or today’s, for that matter.

Also Read: Audit Regulator ICAI Launches Investigation Into PNB Fraud, To Also Scrutinise All Big Borrowers

There were scams in your regime too. You spoke about the Ketan Parekh and Harshad Mehta scams in an article you wrote recently. If appropriate steps would have been taken then to strengthen the banking system, would things have been different today?

In the 1992 Harshad Mehta scam, I was part of the Joint Parliamentary Committee which inquired into the matter and it was the committee under the leadership of a Congressman that did a splendid job. We made a series of recommendations on necessary improvements to the banking system and many other areas like stock markets. Those recommendations were wholesome and were to be implemented by whichever government was in power.

When I took over as the Finance Minister in 1998, there were some recommendations which had still not been implemented and I saw to it that they were implemented. But despite the implementation of the wholesome recommendations, the Ketan Parekh scam took place in stock markets with the involvement of some banks in 2001. So, fraudsters are one step ahead of whatever arrangements we might make to prevent frauds, and that has to be kept in mind.

"Therefore, there is a need to keep a constant watch on the systems which are in place, so that nobody can take the system for a ride. "

Also Read: PNB Asks Nirav Modi To Come Up With A Concrete Plan To Repay Dues

Will this fraud make any difference politically to the BJP and to the Modi government?

I think it will be kiddish to think that it will not. It certainly will, because every government and political party is judged by their electorate, and not by the standard for others or by the performance of earlier governments. They are judged against the promises that they have made. We had made an important promise in 2014 which was a crucial plank for our campaign back then, saying that we will run a corruption-free government. There is a famous saying by Prime Minister that goes by...‘Naa khaunga, naa khane dunga’. Now, people are making fun of it and saying.. ‘Khane dunga, bhagne bhi dunga’. So, we cannot escape the responsibility that this scam took place when we have been in the office for the last four years.

"" - It might have started earlier but why was it allowed to continue?

Secondly, as a political party, it has to be kept in mind that we cannot claim that we unearthed the scam. Why did we take so long to do it then? Let’s not forget that the FIR registered by the CBI does not date back to 2011. It talks about 2016-2017. So, it falls on the government of the day and we have to acquit ourselves by whatever actions we can take to ensure that our image remains clean.

In his first statement on the scam, Finance Minister Arun Jaitley asked, ‘ What were the auditors doing?’ He said auditors and supervisory agencies must question their systems. Is that where the problem lies?

Yes, it does. We have systems in place which involve officers, officials of particular banks, the Reserve Bank of India, the board of directors of the bank involved, etc. All these systems where in place. Audits were supposed to take place from time to time. The RBI was supposed to keep track of the foreign exchange transactions. Still the scam happened. It not only happened once but repeatedly over a period of time. So, how was the whole system taken for a ride? We cannot pin the blame only on the auditors. There will be a number of participants in the system whose roles have to be determined. Immediately after the scam came to light, we were told that a Deputy General Manager and some assistants below him were responsible for the scam. From the case which has been made now, we find that a number of senior people are involved, and they have been arrested consequently. So, a lot of people were involved and the whole system was taken for a ride.

This would not have happened without the involvement of the highest (levels) in the system. When I talk about the highest in the system, I am not excluding the political class from it.

Also Read: Shame On You Crazy Diamond Bankers. PNB Was No Lone Wolf

Is there a need to have a centralised agency in place to conduct an investigation of this scale?

There is no centralised agency which can conduct an investigation on this scale. There has to be a multi-agency team to conduct the investigations. Having said that, I would not put all my trust in agencies of the government. I would like the Supreme Court by some measure to involve itself and monitor the investigations. Only then, we can be sure that the investigations have been impartial and truthful. Otherwise, doubts will linger on about agencies which are under the control of the government being influenced by people in the government.

Is there a real fear of Nirav Modi and others getting away? We have seen investigations fall short in court in the 2G scam case.

Yes, there is a real danger of it. As the 2G scam case shows, if the investigating agencies do not investigate properly and do not put all the evidence necessary for conviction before the court,  then the court will have no option but to let the accused go scot-free. So, it all depends on how honestly, thoroughly, sincerely the investigation is conducted and this is where the role of the government of the day assumes importance. But looking at the past experience, one cannot trust the government of doing what is necessary to be done. That’s why there is need for an independent body to monitor the probe.

Also Read: How The $1.8 Billion PNB Fraud Lasted Seven Years

Apart from the political fallout, this case has impacted the banking system as a whole. What are the serious questions about the Indian banking systems specially the public-sector banks which have been raised right now?

The banking system has lost much of its sheen. It stands almost destroyed today because of the huge NPAs (non performing assets) which have been allowed to accumulate, because of the fact that despite RBI warnings, systems are not followed. People can take liberty with systems in such an easy fashion. All these issues raise serious doubts over the credibility of our banking system. Our banking system is not only a domestic banking system but an international banking system. Lot of damage to the credibility of the country as a whole will be done if the banking system in our country is not trusted.

One of the fallouts of this scam and other scams and the NPAs is that the government must seriously apply its mind and restore the prestige and credibility of the Indian banking system. This is the most dangerous of all developments. Money has been swindled and whether it will come back or not, those responsible will be punished or not are the major issues.

"But the credibility of the banking system is the most important thing at the present juncture. The government must do everything to ensure that the credibility is fully protected, preserved and maintained."

Also Read: Goldman Cuts Price Targets For India’s State Banks After Fraud

In the light of the PNB fraud, demands are being raised to privatise and consolidate public sector banks. What is your view?

Our banking system and especially the banks in public sector are in desperate need for very serious reforms. Therefore, I was disappointed when the government announced the re-capitalisation package for banks and only mentioned some administrative arrangements which had to be improved. I feel that the banking system is in need for some fundamental changes.

Having said that, I would not agree with the thesis that privatisation is panacea for all the ills. We know that private sector banks have also been swindled and indulged in fraud. Co-operative banks have indulged in frauds. We know what happened to the banking system in the United States when the crises took place in 2008. Therefore, to put faith in privatisation of banks is not entirely in order. But for the public-sector banks, it is very essential that they are given complete autonomy which is possible. Let the government own public sector banks. But the complete banking sector should function with complete autonomy. At the moment, the mixed picture of government, RBI and bank management pushing for space is leading to a situation wherein the responsibility cannot be assigned and clearly fixed. So, give them the autonomy they need. Let the government continue to be the owner and let the RBI regulate. This is the system which would strengthen and should be carried forward.

On the question of weaker banks, this has happened in the past, that weaker banks have merged with stronger banks. We can look at weaker banks and see what is needed to be done. When I was the Finance Minister, we had a huge NPA problem which was a legacy problem. There were three banks which were very weak. I said that I will not allow any government funding of the banks and recapitalisation will not be done through budgetary resources. So, we improved the management and took a number of steps to ensure that the banks function properly and those three banks turned the corner. They became efficient banks. So, it’s about what kind of policies you frame and how you implement those policies which are important. That’s the reason why the Ministry and the ministers are constantly in touch with the RBI and public-sector banks to ensure that things remain in order.

What will be your advice to the government and the Finance Minister today on how to tackle this issue over the next few months?

There is only one way. Recapitalisation of banks must be preceded by a series of improvements which the banks must bring about in their functioning which will need application of mind on each bank. That’s where we will know which of the banks will not be able to do it (turnaround) and then we have to take steps to merge that bank with some other banks.

As far as this scam is concerned, let there be an independent Supreme Court-monitored inquiry. Meanwhile, in consultation with RBI, we should look at systems which have failed and those systems should be strengthened. Here the RBI says that we issued the instructions thrice on how SWIFT should be used and how it should be linked to core banking. So, is it an implementation problem or policy problem? That has to be determined and wherever there is weakness, those weaknesses must be eliminated.

After the PNB fraud came to light, a number of people have come forward to say they had warned of problems with Gitanjali group and Nirav Modi group companies. Does this point to a big weakness in the system?

Clearly the complaints were not attended to with the seriousness that they deserved. The routine was to forward it to agencies or whichever department was in charge and that’s where it remained. There are stories that Income Tax raided Nirav Modi’s firm. Then there are these complaints, then FIR was registered, non-bailable warrants were issued. But nothing came of it. So somewhere the system did not function, or was not allowed to function. Therefore, the doubt arises that there was a superior hand which was guiding this and making sure that nothing happened. There are stories that people who had been swindled, franchisees or others which dealt with Gitanjali and Nirav Modi, they were told with complete arrogance by owners of Gitanjali group and Nirav Modi’s firm that nothing is going to happen to them. They are free to do what they like but no harm will come to them. So, where did that confidence come from?

The Smarter way to get your business news - Subscribe to BloombergQuint on WhatsApp

. Read more on PNB Fraud by BloombergQuint.