It is ill-advised for the banking regulator to inflict heavy-handed micromanagement on private banks
The Punjab National Bank (PNB) scandal has stunned the nation. The sudden admission that the bank had detected fraudulent transactions worth a staggering amount—$1.7 billion or roughly a third of the bank’s market capitalization—sent tremors through the entire Indian financial system. As we now understand, the cause of this loss was PNB’s continual rolling-over of bank guarantees (letters of undertaking, or LoUs) to a set of borrowers. These guarantees were issued without the provision of collateral, and in the absence of any real safeguards.