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Rejecting apprehensions of India's banking sector plunging into a financial crisis as a result of PNB fraud, BSE CEO Ashish Chauhan on Sunday said that the amount of fraud in the Nirav Modi case is equivalent to just three days of interest of the country's "solid" banking sector.
He also added that the talk of India's banking sector plunging into a financial crisis is nothing but "fearmongering"
Claiming that India's banking sector is fairly strong and regulated, Chauhan added that the scandal would not have taken place had appropriate reforms in the banking sector including the RBI been taken after the 1992 Harshad Mehta scam.
"We should have reformed the banking sector in 1992. This (Nirav Modi scam) would not have taken place if we had carried out the reforms then. But we have woken up now, we are doing a good job. One of them is demonetisation, other is the GST and third one is bankruptcy code," Chauhan said while addressing the Massachusetts Institute of Technology (MIT) students at the annual MIT India Conference in Washington.
India's second-largest state-run lender Punjab National Bank (PNB) was hit by the country's biggest-ever banking fraud of more than Rs 13,000-crore allegedly perpetrated by billionaire diamantaire Nirav and his associates in connivance with some bank officials.
A special CBI court has issued non-bailable warrants against Nirav and his uncle Mehul Choksi.
Chauhan said that the size of the Indian banking system is "Rs one crore crore".
"In India we (banks) charge 12 per cent per annum from people who borrow. People who lend to the banks, we give them only four per cent. So basically, the banks earn eight per cent (profit).
"So, on Rs one crore core, how much interest you get in one year at 12 per cent? Rs 12 lakh crore. In one month, how much you would get? Rs one lakh crore. In three days, how much you would get? Rs 10,000 crore. What is the size of the Punjab National Banks this particular scam? Its three days interest of the Indian banking system, which will take care of this (scam)," the BSE head said.
"It happens. It is a commercial thing. When they (banks) are taking eight per cent margins, they are assuming that one out of 12 guys are going to be a defaulter. And still they would be okay. They will pay the principal back. One out of those 12 guys in that year has to default," Chauhan said.
"This (Nirav) guy has defaulted over 10 years. So effectively it's 1/10th of the banks. The banking actually works on this. They think, it's the public money. They have already taken the money out of you by not paying the interest.
"Effectively there is nothing there (in the scam). Its fearmongering. The banking sector in India is so solid. It's over regulated, just to ensure that if ever anything happens there is enough money to take care (of)," Chauhan said.
"This kind of scams also give (banks) enough ammunition to take more money out of you. Instead of four, you will get three per cent (interest on deposits) and if you want to borrow, instead of 12 you will get it at 15 per cent. So, do not be panicky, its the other way round," Chauhan added.
(With PTI inputs)
