PUNJAB NATIONAL BANK SCAM

EFFECT OF PNB SCAM ON BANKING SECTOR

Banking shares – The banking shares fall as worries intensify about fallout from a Rs 11,300 crore fraud
at state-run lender Punjab National Bank

A ripple effect – Whatever the amounts at risk may be, those are likely to be stuck in the system for a
while or are possibly unrecoverable. Probably, Punjab National Bank will eventually take the hit, but it is
likely to travel through the courts. Most of the loans to Nirav Modi and his uncle Mehul Choksi were
taken from the overseas branches of other Indian public sector banks. So there will be a “negative
network effect” rippling through the banking system as that money gets stuck. Other businesses in the
gems and jewellery space may also be affected by this negative ripple.

Deepening public mistrust – Second, the Reserve Bank of India will have to plug this gap in the
supervisory system that allows SWIFT-based frauds. Similar scams exploiting holes in SWIFT
supervision and issuing letters of undertaking without collateral are then likely to surface across the
public sector banking system. The recapitalization of the banking system may, therefore, require
considerably more than the Rs 2.2 trillion or so the government has allotted to this task. Where will that
money come from? We are talking about 5% of gross domestic product or more in terms of
recapitalization. There will be huge public opposition to the “bail-ins” proposed in the yet-to-be-legislated
Financial Resolution and Deposit Insurance Bill. Beyond the numbers, the Punjab National Bank scam
has led to further public mistrust of the banking system and doubts about the probity of the current
political leadership. The first blow was demonetization. The erosion of public confidence it caused has
manifested in many ways, such as a refusal to accept Rs 10 coins and the flight of capital into crypto
currency. The next stage could lead to depositors starting to pull cash out of public sector banks.