Banking reforms like insolvency and bankruptcy code and bank recapitalisation will be ineffective unless governance standards are improved at PSU banks, says IMF's deputy managing director Tao Zhang
Mumbai: The International Monetary Fund (IMF) has said banking reforms like insolvency and bankruptcy code and bank recapitalisation will be ineffective unless governance standards are improved, a comment that comes in the backdrop of the PNB fraud.
“Reforms like the IBC Code, bank recapitalisation have taken place. However, for a lasting impact, these efforts are not enough and should be accompanied by governance reforms particularly for public sector banks," IMF’s deputy managing director Tao Zhang said at an event at NSE on Monday.
There is a need to look at the “deeper issue" of governance at the banks, he told reporters later.
Without naming the Punjab National Bank, Zhang said the PNB fraud has “revealed the necessities and urgencies to improve the internal controls", which is crucial not only for improving banks but also “financial stability".
Banks should continue working on improving their balance sheets on a priority basis, he said, stressing that the asset quality situation of the domestic banks has deteriorated compared to their peers elsewhere. He said the financial regulators in India should focus on monitoring and regulating services instead of only institutions.
The Rs12,700-crore PNB fraud, allegedly perpetrated by diamond trader Nirav Modi and his uncle Mehul Choksi in collusion with a few officials of a branch of the PSU bank came to light last month, wherein the duo is alleged to have used a key loophole on the international trade finance front (SWIFT) to defraud the bank.
Modi, Choksi and their officials allegedly got letters of undertaking (LoUs) from PNB’s Brady House branch without having the required securities and also proper trades records in place for many years.
IMF’s Zhang also spoke about financial technology firms, saying capital invested in the over 1,500 firms in the country is expected to go up by 1.7 times by the turn of 2020. India should focus on rapidly developing the sector so that efficiencies get enhanced but also safeguard against risks and also fight misconduct, he added.
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