Fudging of bank accounts must stop
By Nantoo Banerjee
The suspicion that India’s public sector banks have been hiding huge losses on account of non-performing assets (NPAs) under the carpet year after year is now proved to be true. Thanks to the bold decision taken by the State Bank of India’s (SBI) newly appointed chairman, Pratip Chaudhuri, to revisit the audited financial accounts of the bank in the last quarter of 2010-11, that is before his taking over the charge, a Rs. 6,059-crore hole was discovered on the bank’s assets position. As a result SBI’s net profit in the fourth quarter, 2010-11, plunged by 99 per cent to only a meagre Rs. 20.88 crore from Rs. 1,866 crore in the corresponding quarter in the previous fiscal. The most disconcerting news is, however, that the previous SBI management, led by O P Bhatt, persuaded the bank’s auditors not to raise an unnecessary alarm about bad debt that went sour as it would get an unfavourable dispensation from the Reserve Bank of India (RBI), the banking regulator and also the majority shareholder of SBI.
Now that the cat is out of the bag, RBI should ask SBI to conduct a special audit of the bank’s books of accounts for a period of five years, between 2005-06 and 2010-11, or during the entire period under Bhatt’s stewardship. Such a special audit should also cover SBI’s foreign operations. SBI’s North America operations were believed to have lost several hundred millions of dollars in bad loans during the US sub-prime crisis in 2008-09. India’s largest private bank, ICICI Bank, too was said to have lost hundreds of millions of dollars during the 2008 financial crisis in the US following a series of home loan repayment default. Unfortunately, these facts were never clearly made public. ICICI Bank too should be told to conduct a special audit for the same 2005-10 period for the knowledge and benefit of investors, including the bank’s ordinary shareholders, and make suitable provisioning. Statutory auditors are often hand-in-gloves with management. Only a special audit or peer review can provide a more reliable picture of a bank’s or corporation’s state of financial accounts.
The banking industry is notorious for fudging accounts and misreporting and misrepresenting the quality of assets. Bad debts are often shown as recoverable debts. Contingent liabilities are underreported. Fictitious interest incomes from such debts are used to bloat the top line. These, in turn, provide a false picture of a bank’s bottom line. Such practices can be continued by a bank management for years before they become too difficult to hide and reach a crisis point. An unholy auditor-management nexus makes it possible. It would be wrong to suggest that such a trend is only India-specific. The disease is quite wide spread across nations. It has become a worldwide phenomenon as the crash Wall Street banks in 2008 exposed the deep-rooted existence of such a nexus.
In fact, the present governor of New York, Andrew Cuomo, in his earlier position as the attorney general of the state, was so peeved that he held Ernst & Young, the auditors of Lehman Brothers, more responsible than the bank management for the collapse of the Wall Street’s landmark financial institution. The US prosecutors went to the extent of filing civil fraud suits against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the audit firm stood by the statement of accounts while the investment bank misled investors about its financial health. This was for the first time that a major accounting firm was publicly targeted for its role in the financial crisis in the US in 2008 with a shattering effect on investors’ sentiment the world over.
Unfortunately, financial malpractices and ‘bookcooking’ by companies and institutions are rarely treated as a major criminal offence in India. Banks and financial institutions are the worst offenders. Connivance with creditors, large or small, is a routine practice with Indian banks. Their operations are often buried under secrecy laws. Real culprits go scot-free as banks are never allowed to collapse. Corruption is in-built into the system. The tax-payers’ money is routinely diverted by the government to top up banks’ reserves and liquidity levels to help them maintain the required capital adequacy ratio (CAR). The so-called stringent norms under Basel II and Basel III for financial reporting of banks exist only in paper and spoken extensively at seminars by top money managers without relevance to the on-ground practice. The near collapse of the country’s largest public sector financial institution, Industrial Development Bank of India (IDBI), and also of the sickness of the public sector Industrial Finance Corporation of India (IFCI) in the late 1990s never raised a debate in Parliament or even in banking circles.
SBI’s Pratip Chaudhuri is not the lone whistle blower in the matter of the trustworthiness of bank accounts. Before him, Bank of India’s Alok Misra and Bank of Baroda’s A K Khandelwal had raised similar concerns about fair reporting of profits in their respective banks before they assumed the charges. But, their concerns were ignored. Even Chaudhuri’s act was not quite appreciated by the country’s central bank and banking regulator, RBI. The latter was rather sarcastic in some of its recent remarks on the development. RBI Deputy Governor, K C Chakrabarty, was candid in his observation that financial reporting should not be “as per the minds of bank chairmen”. He said: “when bank chairman changes, profits tend to fall. Things should not turn topsy-turvy if bank chairmen change.” The RBI deputy governor’s reaction is typical to the government’s response to on-going financial scams and public outcry against corruption and accounts jugglery. Instead of taking the issue of financial jugglery by bank management more seriously and ordering special audits in at least large banks, RBI is unhappy that the action of some of the newly appointed bank chairmen is causing embarrassment to the banking regulator and the government, which is facing corruption charges from every quarter of the civil society, including Anna Hazare and Baba Ramdev.
Obviously, RBI, the least of all the government, is not prepared to face the bitter truth about squandering of huge bank funds or depositors’ funds, running into thousands of crores of rupees, by the management in questionable advances. One will not be surprised if some of these soured high value bank loans are linked with high-level political pressure, interference, intervention or connection. But, one expects that RBI should, in the national interest, take serious cognizance in the matter. The banking regulator should take a cue from the recent statement of Prime Minister Manmohan Singh on corruption investigation and conduct a thorough probe into the books of accounts of public sector banks, especially of the large ones “without fear and favour”. This will only help improve the standard of financial reporting of banks for the long-term benefit of all. After all, the matter concerns the country’s financial security and investor confidence in the banking system, the so-called protector of public funds. (IPA Service)