BANK MANAGEMENT

COMPARATIVE STUDY BETWEEN THE INDIAN ND CHINESE BANKING SYSTEM

CASE STUDY OF KINGFISHER FRAUD AND RELATED SCENARIO

SUBMITTED TO:MAM RAMNEEK

SUBMITTED BY:SAKSHA SHARMA5810M.COM(II)

BASIC INDIAN STRUCTURE AND CHINESE STRUCTURE

INDIAN FINANCIAL SYSTEM: Mainly it consists of scheduled commercial banks, co- operative banks( rural and urban co- operative banks), development financial institutions, non banking financial institutions.

CHINESE FINANCIAL SYTEM:System as it exists today, comprises of commercial banks, co- operative banks, non bank financial institutions and the capital market.

SIMILARITIES BETWEEN THE TWO SYSTEMS

State ownership is dominant in banking system in both the countries.

Both countries depend upon bank finance for economic growth and capital markets are less developed

The share of commercial banking sector financial assets is likely to increase.

BANKING IN CHINA• Before reforms the state owned commercial banks in china were namely:1. ICBA- Industrial and commercial bank of china2. BOC- Bank of china3. CCB- China construction bank4. ABC- Agriculture bank of china• In 1994 3 new policy banks were established, namely, Agriculture Development

Bank Of China(ADBC), Export and Import Bank of China, China Development Bank(CDB).

• There is nothing like Deposit Insurance in China as per IADI-(International Association of Deposit Insurers) but Hong Kong , a special administrative area under China has deposit insurance for it’s banks.

• Policy Banks operate on No Profit- No loss basis and do not compete with central bank. They fund themselves through central bank loans, government deposits, issuance of government guaranteed bonds held by commercial banks.

REGULATION• In India RBI is the apex bank(central bank) which governs every bank in

the financial system. Scheduled commercial banks are directly covered under RBI ACT 1935 and the unscheduled banks are covered under BANKING REGULATION ACT, 1949.

• Objective of RBI is to ensure monetary stability and operating the currency and credit system of the country to it’s advantage.

• Peoples bank of china is the central bank of China. When the second generation of reforms were initiated in China. CBRC- China Banking Regulatory Commission, national regulatory body over Chinese banking system was set up.

• Both the apex bodies have their own goals and objectives. The policy and responsibilities of both have been divided to avoid any confusions.

PBC AND CBRC

PBC• It has the responsibility of

monetary policy and representing the country in an international forum.

• To reduce the risk and promote stability of financial system.

• To regulate lending and foreign exchange between banks and supervises the payment and settlement system of country.

CBRC• Writing the rules and regulations

governing banks in China.• It conducts examinations and

keeps oversight of banks, collects and publishes statistics on banking system.

• It approves the establishment or expansion of banks and resolves potential liquidity, solvency or other problems that might emerge at individual banks.

LESSONS FROM THE MALLYA CASE

Lack of transparency weakens our public banking sector. In the age of information technology and the Excel spreadsheet, the necessary transparency is literally just a click away.

It appears that not everyone agrees on the true significance of a flamboyant tycoon decamping with debts of Rs.9,000 crore owed to India’s banks. The gentleman is no ordinary businessman at that, having earlier been embraced by the country’s political parties that had rewarded him with membership of Parliament. That such an honor could have been bestowed upon Vijay Mallya, who only inherited wealth to make a lavish display of it when the country abounds with captains of industry who actually generate it, should alert us to how political patronage works.When the incident had been analyzed in the media as an instance of crony capitalism, a maverick economist had quipped that it may be better described as “crony socialism”. Perhaps he had had in mind that it is the public sector banks that had lent so fecklessly to Mr. Mallya, and these had for decades, been showcased as a symbol of Indian socialism.

LESSONS FROM MALLYA CASE

Action and reaction

Bank nationalization in the 1960s led to schemes such as branch expansion, priority sector-lending and the takeover of private banks teetering on the brink thus rescuing thousands of small depositors. But now, four decades later, it can hardly be asserted that the performance of India’s nationalized banking sector has been sterling, with inefficiency and poor service having been highlighted, and it taken the Pradhan Mantri Jan-Dhan Yojana to rectify their failure to advance the cause of inclusion on their own. But nothing quite matches the scale of the present scam, with public banks having lent such large sums of money to a single individual with indifferent capacity and without adequate collateral.We may argue over whether what we have on our hands now is the result of mismanagement, poor judgment or mala fide conduct, but one thing is clear. If the money is not retrieved from Mr. Mallya, the loans would have to be written-off, involving a depletion of our assets for we own the banks. And if the banks are recapitalized via the Budget, it would be us who will foot the bill for his excesses. Either way, it underlines the direct bearing upon us of the actions of public sector banks. There is no escape for us from this connection even if we migrate to the newer private ones for our personal banking, for we would continue to own the public banks.

LESSONS FROM MALLYA CASE

Banks to blame

There is no question that the banks are responsible for the predicament in which they find themselves. How is it that several leading nationalized banks have separately lent such staggering sums to a dubious client struggling to establish himself in an highly competitive industry? There is reason to believe that Mr. Mallya was the beneficiary of pressure brought to bear upon the banks from the outside. And this could only have come from politicians who preside over the banking system in a governing capacity. If this is not the case, then we must worry seriously about how individual public officials can dispense such large sums of public money so freely. Are there no checks and balances in our public sector banks?The term crony capitalism is used to describe a situation of private players being shielded from competition or vaulting over rivals due to the intervention of the ruling class. This usually takes the form of a relaxation of rules or granting of exclusive licenses. The history of the United States in the 19th century is replete with examples of these. But things have improved substantially in that country, and in any case l’affaire Mallya is something worse. It is one in which the Indian public stands to lose directly. In the forms of crony capitalism considered above, the loss is indirect, usually in the form of higher prices. Even in the gigantic market intervention following the recent financial crisis in the United States, money had not been channeled to individuals.

LESSONS FROM MALLYA CASE

Under the Troubled Asset Relief Program (TARP), the government had purchased assets of struggling banks with a view to ensuring that they did not collapse taking along with them the rest of the financial system. These assets were disposed of later at a profit by the government! The U.S. government had acted smartly, while in the Indian case the banks now find themselves saddled with loans made by them to an individual with negative net worth. The irony could not have been more stark. The U.S. government had intervened smartly in a society strongly committed to laissez faire. On the other hand, for a country with “socialist” written into its Constitution, our public banks have unduly favored a hereditary businessman without a sound business plan but with lots of political cronies. Also, the banks had lent to a company that has been in the news for not having paid its employees for a noticeable period of time. Here, India’s public sector banks have acquiesced in the violation of employment rights

Dealing with the mess

Despite Mr. Mallya’s boorish style, we must resist the temptation of a tit-for-tat response, acting always in our best interest. Things that the Government of India can do would fall in two boxes. The first concerns possible ways to deal with the absconding debtor. The second contains measures needed to ensure that public sector banks do not find themselves in a similar situation ever again. On the first, there can be no question that the retrieval of loans made to Mr. Mallya must be pursued relentlessly. There are no grounds for giving him more time to present himself or to settle for less than what he owes the banks. He is perceived as a willful defaulter and must be given exemplary treatment. The actions taken so far by the government are pathetic to say the least. The Finance Minister, under whose watch this has taken place, has not made any definite statement. He must actually announce a plan of action detailing how he intends to bring the businessman to book.

LESSONS FROM MALLYA CASE

Making the process clear

Now onto the second of the set of actions that may be taken by the government in this case. In a plea to the contrary made by the Reserve Bank of India (RBI) to the Supreme Court lies an idea with hidden potential. When handing over a list of defaulters of loans from banks, the RBI is reported to have requested that the names not be revealed. As far as the publicly-owned banks are concerned, this goes against an important principle applicable to the public sector.It would be unfortunate if we are to allow a distinction made between “passive” and “willful” defaulters to muddy the waters. The only question here is whether full disclosure will lead to better outcomes. There is reason to believe that it will. Details of every loan sanctioned by the nationalized banking sector, including the history of the borrower, the grounds on which viability has been ascertained, the guarantors, the collateral pledged and the officials involved may be posted on the website of the bank concerned.We also need to work towards a re-engineering of procedures. It has been suggested that fear of being scrutinized by the office of the Central Vigilance Commissioner has petrified loan officers in the public sector into inaction. It is of no use having a publicly-owned banking system that does not extend credit to sound projects on grounds of retrospective scrutiny. This can be taken care of by moving to a system of whetting loan applications through committees, thus allowing joint responsibility to come into play. Lack of transparency weakens our public banking sector. In the age of information technology and the Excel spreadsheet, the necessary transparency is literally just a click away.

Captain of the 17 bank consortium, SBI, and the ED met to thrash out a strategy for recovery of loans worth over Rs 9,000 crore borrowed by liquor baron Vijay Maya and his now defunct Kingfisher Airlines (KFA).

Officials said the meeting was arranged by the Finance Ministry at the behest of the Enforcement Directorate so that the two sides can discuss the alleged loan default by Mallya and his companies and also chart the way forward.

The two sides are understood to have shared notes and details of probe that they have undertaken till now in the case, which is also being heard by the Supreme Court.

ED is probing Mallya and KFA under anti-money laundering laws in connection with a Rs 900 crore loan default of IDBI bank.

IDBI and 16 other banks have formed a consortium led by the State Bank of India to pursue these cases against Mallya and his companies.

The agency, which wants Mallya to join the probe in this case "in person", is also mulling preparations to attach his foreign and domestic assets under PMLA.

It has virtually exhausted all legal options to make Mallya join the probe including issuance of a non-bailable warrant against him by a Mumbai court based on which it made the requests for revocation of his passport and subsequent deportation bid to bring back the beleaguered businessman from the UK.

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