Reform state-run banks, IMF tells India after PNB fraud

IMF said that banking reforms like insolvency code and recapitalisation will be ineffective unless governance standards are improved.

Mumbai: After the PNB detected a multi-million scam, which came to light last month, allegedly involving celebrity jeweler Nirav Modi and his uncle Mehul Choksi, the IMF on Monday said that banking reforms like insolvency code and recapitalisation will be ineffective unless governance standards are improved.

"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," the multilateral body's deputy managing director Tao Zhang said at an event at the NSE here this evening.

There is a need to look at the "deeper issue" of governance at the banks, he told reporters later.

Without naming the country's second largest state-run lender PNB, he said the scam 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 Rs 12,700-crore PNB scam, allegedly perpetrated by diamond trader Nirav Modi and his uncle Mehul Choksi in collusion with a few officials in Mumbai branch of the state-run 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.

The duo and thier officials allegedly got letters of undertaking from the Brady House branch of PNB without having the required securities and also proper trades records in place for many years.

The Fund official 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.

(With PTI inputs)