CONFESSIONS OF FINANCE MINISTRY - BANKS ARE OVER STATING PROFIT - Fraud by CMDs and EDs of PS Banks for higher incentives and new elevations?
 

 by
 

Rajesh Goyal, Executive Consultant
 

On 16th February, 2012, a report hit the headlines "Finance Ministry Asks PS Banks Not to Overstate Profits". Reading this headline, I felt surprised and shocked. It sent contradictory feelings - why I felt surprised when I was aware of this all along. Why was it shocking when we have discussed this issue in detail in these columns on number of occasions? Before I explain as to why I felt surprised and shocking, let us see just one line extracts of the report, which will speak volumes about the state of affairs of our PS Banks, Finance Ministry and RBI :-
 
 

The letter to heads of PS banks said "instances of over reporting of profits have been continuing year after year and no corrective actions seems to have been taken to stop the recurrence". It further asks PS banks to provide adequate provisions for bad loans.

 
The inferences of the above statement are clearly as follows :-
 

(a) PS Banks have been overstating the profits year after year;

(b) Finance Ministry and RBI are well aware of the fact that PS Banks are overstating profit

We all know that in Banking parlance, when a Manager tries to inflate his deposits / advances by discounting some cheques or bring temporary business, he is liable to be charge sheeted for Window Dressing? Now question arises if EDs and CMDs decide to inflate the profits of the banks, is it merely Window Dressing or a Fraud There is no doubt that it is a fraud using the accounting methods and rolling out higher dividends to Government of India (Finance Minister keeps on demanding from PS Banks higher profits from time to time). It is a method of siphoning of money and weakening of the banks. What are the motives for over-stating the profits? Nobody will do something wrong without any motive ?

Now question arises that if Finance Ministry, RBI and other agencies of the GOI were aware of the fact that profits are being overstated, then :-

  (i) What action has been taken by them in recent years to stop this fraud with the public and shareholders;

  (ii) Who are the people who were responsible for overstating of profits year after year. How many of them have ever been punished for this kind of fraud ? We can find many instances of Managers being charge sheeted for Window Dressing, but is there a single instance where any CMD or ED has been censored for doing this?

  (iii) Why Mr K C Chakrabarty, Deputy Governor of RBI in the last week issued a statement that there is nothing to worry about NPA figures? He even claimed that stress test in the Financial Stability Report has been done and we don't have anything to worry about this. The advisory of Finance Ministry runs totally counter to DG's statement. Does Governor concurs with the statement of Mr Chakrabarty or he concurs with the advisory of Finance Ministry. Mr Chakrabarty had been CMD of two largest nationalized banks before he was appointed as DG at RBI. Therefore, he is one among the few who knows all the intricacies as to how the Balance Sheets of the banks are inflated. By stating that there is nothing to worry - to whom he is trying to befool ? It appears that he was trying to befool common man as Finance Ministry is well aware these facts. The statement runs counter to his love for Financial Inclusion which is meant for common man.

Thus, I can say the contents of the report were neither surprising nor shocking for me. But what was surprising and shocking is that such an admission has been made by Finance Ministry. They have admitted that PS Banks have been doing this fraud (Some CMDs and EDs must have earned those extra bucks as performance incentives and / or promotions for their performance which was based on fraud ) for years together and Ministry is well aware of this.
 
 

The above indicates that something really serious is worrying GOI and soon PS Banks may show up much higher NPA levels. It appears the process to cover up themselves has been initiated by Finance Ministry officials. If anything goes wrong in near future, these officials will say "they said so" and fore-warned the banks and RBI. Bank CMDs will take the plea that they are being audited by the teams of RBI and DG of RBI (Mr Chakrabarty ) has clearly stated that there is nothing to worry and thus they have not committed anything wrong. Finally, as it always happen, RBI Governor and his team of Deputy Governors will also go scot free as nobody dares to touch the regulators and king is never wrong.
 

Thus, in the end the poor man's money will go to drains but nobody will be touched. Long Live babus of Finance Ministry, Deputy Governors of RBI and CMDs of PS Banks.

 
CBI Director has recently admitted that a sum of
 
Rs.24,50,000,00,00,000
 
has been stashed abroad.
 
 

But nobody has been punished for allowing siphoning of such huge money in last six decades. Even now CBI is not thinking of finding as to who allowed such siphoning of poor man's funds. Moreover, CBI is openly admitting that they cannot bring this money back.    
 
 

We Indians only know how to punish Common Man and Not the Top Bosses.   Similarly, an incumbent of a rural branch in Scale I or II will be charge sheeted for window dressing, but EDs, CMDs, Deputy Governors will always go scot free even if bank has overstated profits again and again. Why nobody questions about the motives of over-stating the profits? Classification of top accounts in NPA or standard category is done at Head Office with the approval of GMs, EDs and CMDs and Board. Then in such cases, who needs to be charge sheeted, if Finance Ministry admits that PS Banks have been overstating the profits year after year.
 
 

Let the bankers ponder upon these and raise voice against such malpractices. We are trying through the columns of www.allbankingsolutions.com to bring transparency, as far as possible, in the banking sector. We will continue to educate bankers and general public in this regard.