India’s financial system is subjected to a thousand cuts 

A decade back, the financial system in the US went through a tsunami in a sweeping sub-prime crisis and a catharsis in the collapse of the world's largest investment bank Lehman Brothers. Sensible recuperative actions taken by the US government and regulators have nurtured their financial system back to normalcy. But India's fragile financial system is being subjected to a 'thousand cuts' during the last several years. It is bleeding to a slow death.

India's largest banks, NBFCs, commodity exchanges, stock exchanges, regulators, rating agencies and auditors are all perpetrators as well as victims of this unkind war waged against the country's financial system.

The latest cut, noticed belatedly, was inflicted by a large urban co-operative bank, PMC Bank. It has siphoned-off the hard-earned savings of lakhs of urban poor, small businessmen and marginal sections parked with the bank, to a crony real estate firm HDIL. Believe it or not, it has advanced 70% of all its loan book or 90% of all its deposits to a single dubious entity by opening some 24,000 dummy accounts. This camouflaged scam was going on for the last six years and some of the bank's directors were also directors in HDIL group, in open defiance of norms. But the banking regulator or the co-operatives regulator did nothing in all these years, during which period the wound was swelling day-by-day.

The savvy brass manning marquee rating agencies were not clear in their mind, whether to assign a AAA or a D rating to the bonds of defamed infrastructure- finance giant IL&FS. Only after IL&FS started defaulting on its obligations, the coveted AAA rating makes a ding-dang swing to a junk D rating. In the process, the Rs 1 lakh crore debt of IL&FS becomes toxic and junk from being safest, in a single swing of a roller-coaster ride. During the last one year, the contagion is contained, by deferring its classification as NPA. The chairman of the new board of IL&FS has now confirmed that they will be able to address only 50% of the total debt taken by the collapsed conglomerate. Balance 50% of debt undertaken by it has gone under the drain. The perpetrators and guardians of this bubble, behind a facade of aura and invincibility of a behemoth, are the top and senior executives of IL&FS who took home top dollar salaries for their skills of round-tripping, ever-greening, camouflaging, fudging and dodging.

There is no dearth of high-profile examples to illustrate the shrinking standards of personal integrity in the financial sector. The family of a former CEO of the country's largest private sector bank has floated a company for 'clean energy' with the dirty funds of quid-pro-quo deals.

The temerity of the fallen wizards is also mind-boggling. The promoter of a commodity spot exchange, that ran a Ponzi scheme against warehouse receipts of empty or half-empty godowns, claims complete innocence and says, "It was an employee fraud done in connivance with defaulter brokers. And parallel to this, a political conspiracy was hatched to benefit the National Stock Exchange".

On its part, the National Stock Exchange, country's premier stock exchange set up to counter the broker-dominance and usher-in transparent trading, has let down the small investors by permitting the big brokers to locate servers in the server-room of the exchange.

The mother of all frauds, caused by an absence of checks and balances, has taken place in Punjab National Bank, one of the country's biggest public sector banks. A junior-level official, a deputy manager, Gokulnath Shetty was able to run its Brady House branch in Mumbai as if it was his personal fiefdom. He issued 'letters of undertakings' in "off-line" system for five to six years undetected, to a glib-talking diamond trader Nirav Modi who milked a huge Rs 11,300 crore from the bank. The big and small audit firms who could not raise red flags of such scams in their regular audits, get special 'forensic audit' assignments to unravel the mysteries.

Premier housing finance companies like DHFL borrowed monies by issuing 3-month maturity commercial paper and lent the money for 10 to 20-year tenure home loans. The regulators opened their eyes only after the massive asset-liability mismatches exploded.

The promoter of private sector Yes Bank has earlier counselled to the shareholders that his bank shares are 'diamonds'. Now the bank shares have turned into 'penny stock', aftermarket talk of the bank's concentrated exposure to the toxic assets of DHFL and Anil Ambani group.

The list of cuts inflicted on the financial system is endless. The stock of band-aid is running out.

(V Venkateswara Rao is a retired finance professional and a freelance writer).