Sharp business practices of banks need to be curbed

Updated - November 16, 2021 10:10 pm IST

Published - March 24, 2013 11:34 pm IST

Central bankers, as a breed, are known for their reticence and taciturn countenance. Markets and the media alike scramble to read between the lines when central bankers speak. Not so with Reserve Bank of India’s Deputy Governor, K.C. Chakrabarty, who is an atypical central banker.

He speaks his mind, and when he does so, he is an absolute delight for the media. Last Thursday, Dr. Chakrabarty dismissed the allegations of money-laundering by three private banks — ICICI Bank, HDFC Bank and Axis Bank — almost contemptuously. “Let us not downgrade ourselves,” said Dr. Chakrabarty drawing a distinction between money-laundering and money on which tax is not paid, adding for good effect, “You don’t need a sting operation to show that, in this country, people have black money.”

He was bang on the dot in his assessment of the sting operation by Cobrapost which exposed nothing more than the willingness of low-level bank officials to cut corners in their eagerness to grow their banks’ businesses. What the sting showed was bank officials advising prospective clients on ways — admittedly, some of them sharp — to fly under the radar of the taxman while converting black money into white. Whether such advice resulted in actual transactions is being probed by the RBI now.

Stuff such as opening multiple bank accounts to split cash deposits into smaller sums that will escape detection or using an account in a small co-operative bank to deposit cash and later moving it to a bigger bank are not exactly new or innovative ideas nor have they been invented by these sales officials low down in the food chain of private banks. These are time-tested practices to get black money into the system, and even a rookie chartered accountant who has just established his practice will give you such advice.

Working the holes

As Dr. Chakrabarty rightly said, these are systemic loopholes that have been around for a long time and one that the central bank and the government are aware of. Indeed, it is to plug these gaps that the central bank mandated KYC (know your client) norms and the government made PAN (Permanent Account Number) mandatory for all financial transactions including opening of bank accounts.

Yet, people do find ways to work around the system. It is a common fact that property deals in big cities such as Delhi and Mumbai generate unaccounted money as sellers insist on cash for a large part of the deal’s value, sometimes even as high as 80 per cent. This cash has to find its way back into the system and the ideas given by the bank officials in the sting are some of the ways in which this happens.

That said, there is no question that such sharp practices indulged in by banks — largely from the private sector, but possibly also from the public sector — in their competitive urge to grow business need to be curbed. The RBI will complete its enquiry into the three banks by the end of this week and even if it does not find any evidence of such transactions, it will obviously have a quiet word with them and advice them to conduct their businesses with restraint.

The larger picture

The central bank has reason to be worried because it is now in the process of licensing new banks the first of which could be reality by this time next year. More banks mean more competition and a greater possibility that they would resort to sharp practices to corner business.

Yet, to term these practices as aiding money-laundering is a bit over the top. The kind of advice or practices revealed in the sting operation will pale into insignificance when compared to what is real money-laundering — using overseas tax havens to convert ill-gotten wealth into perfectly legal money. The source of such money is often illegal activities and routes such as havala are used to move the funds out of the country.

If the value of individual transactions of the kind revealed by the sting operation are tens of lakhs or a few crores of rupees, the ‘round-tripping’ of ill-gotten money that first moves to tax havens such as Mauritius and then returns to the country masquerading as overseas investment runs into hundreds if not thousands of crores.

Financial instruments such as participatory notes (PN) issued by foreign institutional investors to their clients for investing in the domestic stock market are just one of the favoured modes for those laundering unaccounted money and getting it back into the financial system in India legally. There is great harm to the financial system and huge tax evasion from this kind of money-laundering but yet the government has been unequal to the task of controlling it. While the kind of activities revealed by the sting operation need to be curbed, it is money-laundering of the overseas kind that RBI and the government need to be more concerned about.

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