Curbing Malpractices within Private Banks

Context:

Numerous private banks in India have been implicated in significant irregularities and malpractices, with some of these infractions highlighted in their Inspection Reports since the Supreme Court directed the Reserve Bank of India (RBI) to make such reports public under the RTI Act. However, the RBI is currently hesitant to disclose these reports publicly as per the RTI Act.

Relevance:

GS3-

• Banking Sector and NBFCs
• Growth and Development
• Monetary Policy

Mains Question:

Reports reveal widespread irregularities and malpractices, including gross misuse of public funds by top management, highlighting the urgent need for reforms in private banks. Analyse. (15 Marks, 250 Words).

Recent Instances:

• The RBI had to enforce withdrawal restrictions on a prominent private sector bank for a period, while the former CMD of another major private sector bank is currently under arrest for serious allegations of misappropriating public funds.
• Inspection Reports obtained through the RTI Act from private banks by the RBI reveal significant misuse of public funds by top management.
• Another private sector bank has gained notoriety for its high number of Non-Performing Assets (NPAs). The significant fluctuations in the share prices of certain private sector banks have raised concerns about the safety of public funds deposited in these institutions.
• The Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the RBI, is obligated to compensate depositors of collapsed banks, including those in the private sector, with a maximum of five lakhs rupees from state funds.
• This reliance on public funding underscores the need to classify private sector banks as “public-authorities” under section 2(h) of the RTI Act. The closure of the private PMC Bank in Maharashtra, which resulted in the loss of lives among several depositors, serves as a poignant example.

Concerns Associated with Private Banks:

• To stimulate business growth, many banks offer loans secured by properties at values exceeding their actual market worth, contrary to regulations permitting loans based on only a portion of the assessed property value.
• It is a common practice for many private banks to obtain blank papers, loan application kits, and signed cheques from borrowers and their family members as guarantors, which they may then misuse at their discretion in the event of loan defaults.
• Borrowers often sign these blank documents hastily, without fully understanding the potential consequences, in their eagerness to secure loans. However, negligent banks typically fail to provide borrowers with consumer copies of the loan application kits, leaving them effectively financially dependent on such banks.
• There was a report indicating that the China Central Bank attempted to increase its ownership in HDFC Bank from 8 percent to 1.1 percent, despite already holding approximately 17.5 million shares in HDFC Bank.
• Although the Indian Government subsequently enforced stricter regulations concerning such stake increases by neighboring companies, this incident instilled a sense of uncertainty among investors in RBI bonds facilitated through HDFC Bank.

Way Forward:

• To dispel any ambiguity, the RBI should adhere to the original Supreme Court ruling by making the Inspection Reports of all banks accessible on its website. Furthermore, it should be mandatory for all banks to publish their Inspection Reports, including past ones, on their respective websites.
• Offering loans secured by properties at values exceeding their actual market worth can and should be curbed by introducing a retrospective rule requiring banks to close loan accounts if borrowers unconditionally surrender possession of the mortgaged property.
• Stringent measures under section 46A of the Banking Regulation Act should be enforced against officials approving loans exceeding the recovered amount from the sale of mortgaged properties, especially when the bank already possesses sufficient margin money.
• A system should be established wherein a copy of the completed loan application kit and signed cheques is compulsorily sent via Registered Post to the borrowers, guarantors, and a dedicated section of the RBI within seven days of loan disbursal.
• This measure aims to prevent banks from exploiting any other blank documents previously obtained in the event of default. This requirement should also extend to non-banking financial companies (NBFCs).
• Furthermore, a regulation should mandate that all bank accounts held by government offices, Public Sector Undertakings (PSUs), and state-owned corporations, both at the central and state levels, must exclusively be maintained in public sector banks.
• Additionally, employees of these entities should have their salary accounts in branches of the same public sector bank to facilitate salary disbursements through simple bank transfers. Subsequently, government employees may transfer funds to banks of their choice.
• RBI bonds, issued by the Reserve Bank of India (RBI), should exclusively be offered through public-sector banks and enterprises.
• Furthermore, all banks, particularly those in the public sector, should adopt a standardized format for various banking forms. Customers should be able to download and fill out these forms electronically, similar to the process for passport application forms.
• Additionally, customers should have the option to email completed forms, along with required documents like ID proofs and PAN cards, to the bank. This streamlined process not only saves bank staff time spent on manual data entry but also reduces the risk of errors or incomplete entries. Customers would only need to visit the bank to sign these emailed, computer-filled forms.

Conclusion:

Given the substantial involvement of public funds in private sector banks, it is imperative for all such banks to fall under the purview of the RTI Act. As per Section 46A of the Banking Regulation Act, all employees, up to the highest post of CMD, are considered public servants. A system should be devised to standardize requirements such as minimum balances, interest rates, bank charges, and procedures across all public-sector banks. This uniformity would promote transparency and ease of understanding for customers across different banks.