Public Administration Mains 2018 : Model Question and Answer - 77

(Public Administration Paper II / Chapter: Financial Management)

(Current Based) Question: PNB scandal points incomplete financial sector reforms , failure of risk management and auditing systems. Comment. (20 Marks/350Words)

Model Answer:

 The Punjab National Bank-Nirav Modi scandal has, once again, given rise to questions about public sector banking in India. The mixing of the business of banking with government is fraught with difficulties. Public ownership effectively reduces the RBI’s powers to punish managements and boards of banks when they fail to perform their key role of managing risk.

The PNB-Nirav Modi fraud highlights the failure of operational risk management and auditing systems. It is reported that the RBI has asked the PNB to pay other banks who gave credit based on the PNB’s guarantee. If the PNB pays up and suffers losses, would it be the taxpayer who will fill in for these losses through further re-capitalisation of the bank.

The reforms of 1991 changed the way business works in India. They allowed the private sector to set up production and import without needing licences. They fundamentally took government out of the role of determining how and what should be produced. However, what they failed to do was to take the government out of the role of financing production and trade.

Today the taxpayer pays when PSBs fail to perform these functions properly. Narrow banking by PSBs can take this burden away from the taxpayer. By maintaining a largely bank dominated financial system and keeping it public sector dominated, India tried to run a market economy on one leg. The other leg, of finance, that should have supported the market economy, has been dragging the economy down. (Total Words- 327)

Valuable inputs from The Indian Express Opinion : ‘Lessons from a Fraud’ by Ila Patnaik

(Linkages: Public Sector Banking and Financial Sector Reforms, Public Sector Banking and Failure of Risk Management, Public Sector Banking and Failure of Auditing System)

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