Murky Banking

 Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross.

Money laundering through banks !!  The  bizarre  and ignominious face of banking has finally  surfaced in India as well. A recent expose has validated the fact that Indian pvt. banks are not insulated from the vices of global private banking. Stories of LIBOR fixing scandal in Britain, bank finance to terror  in Iran and HSBC drug cartel now has an Indian edition as top notch Indian banks ICICI, HDFC and Axis bank involved in money-laundering. Govt is planning to bring in new players in banking industry, while finance Ministry and banking regulator Reserve Bank of India seems to be in complete dark about the maladies of Indian banking. This Cobrapost (web magazine) sting expose also dares the effectiveness of  Know Your Customers norms. It seems that KYC norms make genuine   customers to run from pillars to post but the same gets violated for the good of those deterring whom is the prima facie motto of KYC. 

A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank, estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. It is no rocket science to guess how this much of unaccountable cash sloshes about in the economy without getting caught. Definitely RBI and Finance Ministry are intimated with the fact that it is banks that facilitate such fraudulent activities but former has taken it for granted that latter will keep faltering and black money will keep laundering. There used to be “The Banking Cash Transaction Tax (BCTT) which would levy a tax of 0.1 percent on individuals who withdrew or deposited more than Rs 50,000 in a single day in cash. Even encashment of fixed deposits paid in cash were subject to this tax but Finance Minister P. Chidambaram withdrew BCTT for no obvious reason befor 2009 general election. Thus, instead of creating a tougher regulatory regime he seemingly preferred to make the system more feasible for misuse.

The most startling fact coming out of CobraPost revelation is that the whole process of turning black money into white is done via Standard financial practices like opening bank accounts, putting money in insurance products, allotting bank lockers and also via inventing exclusive investment plans for moneyed customers. It seems that banking officials are working as wealth managers for their revered rich clienteles and, for the purpose, don’t even hesitate to tamper with the accounts of innocent account holders. The ease and comfort with which the banking officials of those three banks seemed to be dealing with the customer in the sting videos makes it obvious that those higher up in the hierarchy would have been surely in the knowhow of such acts and if they weren’t, its even pathetic because if the higher authorities in the same institution are oblivious of what lower rung officials do, one must not expect much from RBI and Finance ministry.

Banking is a complex system and with the inception of electronic banking it has become even more complex regulating which is a hard challenge now. Vigilance hasn’t grown the way banking system has developed. Prevalent regulatory and monitory measures such as, Foreign Exchange Management Act or Prevention of Money-laundering Act, are victim of inadequate and incapable implementation. It is high time that Reserve Bank of India graduates itself as far as bank monitoring is concerned. It cannot do away with its responsibility just by imposing KYC norms on banks. It must fabricate a robust mechanism to keep a constant vigil on banking institutions making latter answerable to former.

Tons and tons of literature are there to validate that banking fraud has become a global phenomenon. Considering this, Governments worldwide are gearing themselves to implement stringent regulations and punitive measures to curb banking frauds. For instance, huge penalty has been put on banks indulged in LIBOR fixing scandal, HSBC was also adequately fined for laundering money to Mexican drug dealers and the issue of Iranian banks financing terrorism was also dealt with impeccably.

The callous attitude with which RBI and Finance Ministry is dealing with this bank scandal is pathetic. Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross. Banks are the most crucial economic institutions. An arbitrarily banking is disastrous. It’s high time that Govt. clears this banking mess by taking swift and strict actions against ICICI, HDFC and Axis bank. Firing lower-rung officials isn’t enough; senior management must be made accountable to this wrongdoing. Apart from this, a robust mechanism having modern regulatory laws must be incepted as soon as possible so that the future possibility of any such happening can be deterred in the bud.

Real State of Challenges

Govt. must try to not only weed out the black money from realty market but also provide affordable housing to its burgeoning middle class. 

India’s growing realty sector has become a multi faceted regulatory challenge for the Govt. On one hand the very purpose of providing affordable housing has fallen flat, on the other it has given rise to the circulation of black money in the absence of stringent regulations. In a bid to regulate this shoddy real estate market, the forthcoming budget might bring in a Real Estate Regulatory Authority. Flourishing realty sector is paramount as it is a 5% contributor to GDP and a huge source of job provider to unskilled labor. The multiplier impact of the same on its ancillary segments is also abundant. With the rapidly growing urban population providing affordable accommodation to them is the foremost duty of the Govt. It would be interesting to watch how it ensures transparency and affordability in the Indian Real Estate Sector through its recent effort of appointing a National Regulator.

The biggest trouble with the realty sector is that it has become a reliable source of parking black money emerging as one of the best investment option to evade taxes for people sitting on wads of unaccounted money. In addition to this numerous approvals needed for property purchase provides chain of chances to make many people party to corruption. This cartel of dealers, brokers, investors and corrupt bureaucrats involved in illicit transactions and illegal land acquisition makes it a tough call, a nightmare for middle class salaried house-hunters to even think of owning a house. Stringent RBI guidelines for land loans and the fact that most of the real estate transactions are made in cash makes it even tougher for them to acquire enough money to go for such high profile land deals. In the end it is only high-heeled crooks who grab the land and sells it on even higher prices giving birth to a vicious cycle. It seems that real sector boom is not because of the maxim of demand and supply but that of spare black money and no other option to invest.

While India is among the top countries in terms of housing and work space needs, it ranks 181 in construction permission processes according to the World Bank Doing Business Report 2012. Delays in consents add 40% to a project’s cost. It is in this back drop that Real Estate sector is in hope of acquiring industry and infrastructure status, a demand further endorsed by Confederation of Real Estate Developers' Associations of India (CREDAI) - NCR and Federation of Indian Chambers of Commerce and Industry (FICCI). It will make affordable housing a sub-sector which will reduce the no. of approvals requisite from the state Govt. It will also help cash strapped developers to easily procure finance from banks.

As above mentioned, efforts are made in the forthcoming budget session to approve a Real Estate Regulatory bill in order to keep a check over unrestrained and concealed land transactions. As per this regulatory bill, the developer has to get accreditation from national regulator and make a public disclosure of on-sale property intimating them with all necessary details. Regulator will also ensure that separate bank accounts for each project are maintained to collect payments from buyers. However, strong nexus between real estate market players and politicians leaves the success of this real estate regulatory bill suspicious.

Govt. must recall that the three major economies i.e. of USA, UK and to some extent of China went into a deep slowdown just because their real estate market failed. The significance of realty sector is bumping up day by day with the ever increasing population. It is high time that the actual status of demand and supply of housing is maintained so that a middle class salaried person isn’t charged exorbitantly out of market price. It is required that whatever measures are being taken in the upcoming budget session, must be impeccable enough to strongly tighten the Indian Real Estate Sector.