Common Grounds in the Collapse of Banks: PMC Bank, Yes Bank, and DHFL
The recent series of bank collapses in India, with notable mention to PMC Bank, Yes Bank, and DHFL, have sparked extensive debate and scrutiny within the financial sector. It is paramount to identify and analyze the underlying reasons that led to these collapses, which extend from faulty decisions and unethical practices to systemic failures. This article delves into the common grounds that connect the fall of these institutions, focusing on governance, fraudulent practices, and audit failures.
Systemic Factors Contributing to Bank Collapses
The collapse of each of these banks or non-banking financial institutions (NBFI) is rooted in a common issue: the increase in Non-Performing Assets (NPAs). Unexpectedly, the rise in NPAs is linked to the economic downturn, which in turn can be attributed to the incompetence and dishonesty present within the financial hierarchy.
Several emblematic failures include:
Prominent banks such as Yes Bank funded illiquid companies like Jet Airways, which subsequently led to heavy NPAs. PMC Bank and DHFL sanctioned loans to problematic entities, such as HDIL, compromising their financial health.These instances, among others, clearly demonstrate a pattern of flawed decision-making and oversight. It is essential to explore the root causes in greater detail to prevent such catastrophic failures in the future.
Corporate Governance and Fraudulent Practices
A recurring theme in the misfortunes of these banks and NBFI is the mismanagement and dishonesty at the highest levels of governance. A prime example is how these institutions did not accurately report the true values of their NPAs. This discrepancy is not limited to individual instances but is indicative of a broader issue within the financial sector.
The corruption within the banking sector is compounded by the failure of regulatory bodies. The Reserve Bank of India (RBI), which nominates directors, has been criticized for its inability to address the deteriorating situations. Regrettably, not a single director of the RBI has been held accountable for their failures. This highlights the need for a more stringent regulatory framework and accountability mechanisms.
Besides governance, the lack of transparency in loan sanctioning and a culture of favoritism also contribute to the problems. Bank officials were often found to be acting in collusion with industrialists, accepting kickbacks through underhanded deals. The manipulation of accounts by chartered accountants, in accordance with the wishes of the board, further exacerbates these issues.
Role of Chartered Accountants and Auditors
The role of chartered accountants and auditors in the fiscal health of these banks cannot be overstated. Unfortunately, many of these professionals are complicit in the manipulation of accounts, prioritizing their financial benefits over ethical obligations. One can argue that if law enforcement agencies, such as the police, are not held accountable for their actions, then similar corruption within the banking sector will persist.
One proposed solution is to transfer the auditing of banks to the Central Auditing Officer (CAG). By doing so, the independence of the audit process can be enhanced, ensuring that financial health checks are conducted without undue bias. The current system, which involves chartered accountants who receive substantial fees, often fails to provide a thorough and impartial assessment.
Conclusion: The collapse of banks such as PM Bank, Yes Bank, and DHFL underscores the urgent need for reforms in corporate governance, stringent regulatory oversight, and unbiased auditing practices. Addressing these issues will not only protect the financial health of individual institutions but also safeguard the larger economy. It is crucial that elected officials and regulatory bodies take notice and implement necessary changes to prevent similar failures from recurring.