Key takeouts from CobraPost sting on HDFC, Axis and ICICI

Key takeouts from CobraPost sting on HDFC, Axis and ICICI
R Jagannathan

The CobraPost sting operation that has uncovered alleged connivance in money laundering by three of the bluest of blue chip Indian banks – HDFC, ICICI and Axis –  is a stinging indictment of our black money culture and the Reserve Bank's ability to police the banking system.
 
It also raises question-marks about the advisability of giving private sector businesses banking licences at a time when there is political pressure for the same, and weak willingness to create a tough regulatory regime.
 
The sting – assuming its video-graphed contents are fully authenticated – is chilling for the simple reason that an unknown person claiming to represent a politician with tonnes of black money is easily able to convince bank officials that he needs  solutions for converting black money into white. Not only are the bank officials willing to oblige, but they go out of their way to be helpful – ignoring basic requirements like Know Your Customer (KYC) norms or PAN card details. And this aspect plays out not just in one branch or one zone, but across several banks and branches spread all over India (read the CobraPost summing up of the sting here).
 
The implications are huge for our banking system, reeling as it is under bad loans. If it is now proved that private banks are making money hand over fist not by legitimate means, but by laundering funny money, it can destroy public faith in banks too.
 
 The following are some key takeaways from the sting.
 
One, the sting puts under a cloud the reputations of some of our iconic bankers. HDFC Bank has just had a widely acclaimed book written about its success (Bank for the buck), and its Managing Director Aditya Puri is one of India's most awarded bankers. HDFC Bank's parent promoter is none other than Deepak Parekh's HDFC. Parekh is part of almost all key decisions on the financial sector. He has been on several government committees, including the management panel set up to rescue Satyam after the scam.
 
As for ICICI Bank and Axis, both are headed by two of India's most celebrated women achievers – Chanda Kochhar and Shikha Sharma respectively. Many of the  managers caught in the sting appear to be women bankers – and this can't be a comforting thought to anyone. (This is not to say women bankers are a problem, but many private bankers have women at the front end).
 
Two, if personal bankers at the front end can take such big decisions on helping people convert black cash into white investment, as the sting suggests, it means that the top managers of the bank cannot feign ignorance. When the absolute top may have plausible deniability, such operations cannot be carried out without at least someone in the tier just below the top giving them the nod.
 
Three, HDFC, ICICI and Axis Bank are among India's best-known banks, and they are run by professionals and not private promoters. If professionally-run banks can do this, one wonders how it is safe for banks run by Indian businessmen to be allowed into this arena without huge fetters.
 
Four, the Reserve Bank of India, clearly, does not have either the will or the capability to police banks. Clearly, banking supervision needs to be hived off from its regulator function and invested in a fully autonomous and professional body.
 
Five, a key change in the law that allows banks to deal in so much cash was the withdrawal of the Banking Cash Transactions Tax in 2008 by P Chidambaram. The tax, always unpopular with politicians, was introduced by Chidambaram earlier during UPA-1, but removed just before tine elections of 2009.
 
While doing so, he said in his budget speech: "The Banking Cash Transaction Tax (BCTT) has served a very useful purpose in enlarging the information system of the Income Tax Department. Since the information is also being gathered through other instruments introduced in the last few years, I propose to withdraw this tax with effect from April 1, 2009."
 
This now seems to have been off the mark. If the tax had been around, it could have made it tougher for banks to launder money.
 
BCTT levied a tax of 0.1 percent on individuals who withdrew or deposited more than Rs 50,000 in a single day in cash. Even encashments of fixed deposits paid in cash were subject to this tax.
 
Maybe, Chidambaram was too hasty in removing this tax.