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New Scams, Same Old Story

Dec 14, 2016

In the Issue
» Another Regulator for Digital Payments
» Who to bank on - Private or Public sector banks?
» Outcome of Fed Meet
» And More...
00:00
Madhu Gupta, Research analyst

Banks are back in the news. And once again for all the wrong reasons

Just the other day, a regional daily alleged that Axis Bank's license is set to be cancelled. I knew this was a rumour, so I wasn't surprised. In fact, it felt like déjà vu all over again. And these kinds of rumours are likely to keep surfacing from time to time. Nothing much changes in this sector.

The focus on Axis Bank was due to the recent accusation of money laundering post demonetisation.

What did the bank do? It suspended the 24 employees who were caught red handed.

What did the RBI do? It dismissed the rumour about cancelling the bank's license.

Now rewind back to early 2008. The banks were at the centre of a global financial crisis.

India's largest private sector bank, ICICI Bank, was under fire. It was found to have huge exposure to toxic assets in the US and UK. The bank's reputation took a big hit and depositors lost trust. In fact, the bank faced a crisis of sorts as people scrambled to shift their deposits to public sector banks. It also saw the likes of IT major Infosys shift its loyalty in favour of State Bank of India.

But a few years down the line, after a few cosmetic changes, all was forgotten and forgiven. ICICI Bank was back in the limelight and got back its deposits.

In 2013, a sting operation by Cobrapost showed 22 state-owned and private banks were brazenly involved in money laundering acts.

What did the banks do? They suspended the employees who were involved.

What did the RBI do? It imposed some nominal fine and let the banks off with a warning.

The same story continues to unfold every now and then.

Both public and private sector banks in India are extremely susceptible to such corruption. None of the banks' managements, nor the RBI have, taken strict measures to dissuade such acts.

And in the absence of checks and strict regulatory action, banks continue to violate norms with impunity.

The fact is that nothing changes at the ground level for banks. It is business as usual for them even after a scam is unearthed. And depositors have learned to ignore such instances.

But shareholders must factor in these risks. They can damage the trust factor of banks and even jeopardise their very existence.

At Equitymaster, we assign the greatest importance to management quality and integrity while valuing stocks. Indeed, it's the core of the safety parameters that we look for in the best stocks.

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02:30 Chart of The Day

So apart from the issues we have already highlighted about banks above, here is another interesting development. According to an article on Economic Times, the office of the banking ombudsman had received around 1.02 lakhs consumer complaints in FY16. The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.

Consumer Complaints Surge Against Private Banks


While the major complaints were lodged against the PSUs, but complaints against the private sector saw maximum rise. Widely known for providing efficient services, the private sector seems to have come under the line of fire.

03:10

After much noise about eliminating black money from the system, an effort that's turning out to be damp squib, it is 'cashless economy' that has become the latest agenda of the government. In the process, several measures have been announced.

In fact, the government had set up a panel - Watal committee. It includes representatives from banks, payment service providers and the central bank, to suggest ways to encourage India's movement towards a cashless economy. The panel has recently come up with some recommendations to make India's cashless drive a safe sailing experience. One of the recommendation that the panel has given is that payments regulations should be independent of central banking, and has proposed the creation of a Payments Regulatory Board (PRB) within the central bank. This would be an independent decision making body having some members outside RBI.

Appointing another independent regulator could mean reducing the RBI's powers. For e.g. recently, the RBI had questioned government's proposal to dramatically lower charges on debit card transactions as it would have made the business unviable for banks. If the new body comes up and takes upon the role of managing country's digital transactions, will it be able to play an independent role as the central bank has been doing so far? Furthermore, will it ensure safeguarding interests of all crucial economic entities in the rush towards cashless economy?

Another moot question is if RBI is compromising its functional autonomy in making India a cashless economy? Only time will tell.

03:50

A two day US Federal meet will get concluded today. And whether or not the board will decide to raise interest rates is something yet to be seen. We will write on its impact in the tomorrow's 5 Minute Wrap up. Stay tuned.

04:10

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04:30

In the meantime at the time of writing, the Indian share markets have continued to trade flat with a negative bias ahead of a certain Fed rate hike later in the day. Sectoral indices are trading on a mixed note with realty and information technology stocks leading the pack of gainers. Whereas, metal and PSU stocks heading the losers. The BSE Sensex is trading lower by 72 points while the NSE Nifty is trading lower by 26 points. The BSE Mid Cap index is trading down by 0.4% while BSE Small Cap index is trading down by 0.2%.

04:50 Investing Mantra

"Banking is good business, unless you do dumb things" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Bhavita Nagrani (Research Analyst).

Today's Premium Edition.

Realty Index Down and Out: What to Do?

With demonetisation takings its toll on realty stocks, is this a good time to pick
Read On...Get Access

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Equitymaster requests your view! Post a comment on "New Scams, Same Old Story". Click here!

1 Responses to "New Scams, Same Old Story"

Jayanth GN

Dec 15, 2016

While we all get the same news and keep on interpreting it .. I think it would be wise and also as per equitymaster's charter to keep to the stock recommendations and inform users/readers on how to benefit/be wary of current situations. Everyone is being bombarded with views on news ... so it might be better for wq to stick to basics..

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Equitymaster requests your view! Post a comment on "New Scams, Same Old Story". Click here!
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