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PNB scam shouldn’t lead to fear psychosis in financial system

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PNB scam shouldn’t lead to fear psychosis in financial systemThe government and the Reserve Bank of India should make sure that the Rs 13,000-crore PNB scam does not lead to a “fear psychosis” in the financial system which chills economic activity in the country, a prominent industry lobby has said.

Emergence of the scam should not lead to a “paralysis” and “fear psychosis”, Rashesh Shah, the president of FICCI said.

Shah, who also chairs the diversified financial services company Edelweiss, said he has written to both the RBI and the government with a request to ensure that the country does not slip into that zone.

On whether the emergence of the Punjab National Bank scam, allegedly involving diamond trader Nirav Modi, is a throwback to the latter part of the UPA-II regime, where the fear of the 3Cs, CBI, CAG and CVC led to a chill in activity, Shah said, “We have to overcome the fear psychosis. Investigation should not result in fear psychosis.”

He, however, answered in the negative when asked if scams involving Nirav Modi or the over Rs 3,500-crore fraud involving Rotomac Pens promoter are akin to the emergence of corruption allegations faced by the Manmohan Singh government in its final years.

A top official from one of the few lenders not having any exposure to the companies promoted by Nirav Modi or his uncle Mehul Choksi of Gitanjali Gems, said the scam has come as a “shocker” which will “definitely have short term impacts” through a slowdown in lending.

A media report said banks, especially the state-run ones, have turned defensive when it comes to lending during what is otherwise a “busy season”.

The report quoted an unnamed official as saying that lenders do not have the time to go through loan proposals and disbursals have slid down in the list of priorities for bankers.

Shah called the risk adjustment that has either resulted in a chill to fresh lending or upped the borrowing costs, as a shift to risk aversion and maintained that this will be temporary.

He said it will take up to six months for the system to stabilise.

“The fact that it could continue for as long as it did, that is what is the more worrisome part,” the banker quoted earlier said, adding that periodic reviews seem to have glossed over the discrepancies.

Shah said emergence of frauds like these should make the banking system stronger, and cited earlier instances like the Harshad Mehta scam in 1992 and the Ketan Parekh scam in 2001 where the system responded by strengthening itself.

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