Unjust industry demand

Lobbyists are up in arms against the RBI’s decision to discontinue the now-infamous Letters of Undertaking (LoUs), a credit instrument misused by Nirav Modi to cheat the nation of Rs 13,600-crore. The usually unctuous industry associations — in effect lobby groups mainly controlled by cream of India Inc. — have quickly labelled the move as a death knell for the vulnerable small enterprises. They argue that the withdrawal of LoUs would greatly distress importers and, as a result, value-added exports will dwindle. These industry associations, however, forget that small entrepreneurs seldom get credit facilities without adequate collateral. In fact, small entrepreneurs have little say in the internal affairs of the major industry bodies that are now batting for them. Similarly, privileges like LoUs and other such bank guarantees are primarily available to those at the top of the corporate pile. The industry associations should, therefore, think twice before pressurising the government and the RBI to continue a rogue system that is prone to frauds.

This is not the first case of misuse. A similar misadventure was unearthed over a quarter century ago when stockbroker Harshad Mehta exploited a similar loophole in the banking system. Now, the PNB scam is an empirical example of how scamsters continue to exploit systemic loopholes — Mehta used fake bank receipts and Modi used bogus LoUs. Although, these instances are now in public domain, there could be many other undetected ponzy deals. Apex chambers should ask the government and the regulator to purge the system and plug the loopholes instead of taking shelter behind the MSME excuse to keep the scam-gate open. 

Ideally, all banks should function on the basis of their commercial prudence. This requires the RBI and the government to coax banks into closing all systemic loopholes. Subject to the regulations, banks should be allowed to take higher risks for better returns on commercial principles. The public sector banks may not, however, act purely on commercial principles as they are the extended arm of the government for public services like Jan-Dhan Yojana etc. But both banking arrangements need to close loopholes after taking the on-ground situation into consideration.