Banking on unaccounted money in India

De-centralisation is always seen as the preferred alternative to let a system function smoothly. But as Indians have been discovering this week, private may not always be good for the public.

A web publication called Cobrapost alleged on Thursday that India’s three leading private banks (by assets), ICICI, HDFC Bank and Axis Bank, were engaged in money laundering on a massive scale.

The report has led to a probe being established by the central Reserve Bank of India (RBI) to see where the black money was becoming pristine white, and how.

For customers of these banks (of whom quite a few are non-resident Indians from the Gulf), the news that their transactions may be inadvertently getting diverted into slush funds and dubious trade will perhaps make them go back to the much-reviled public sector banks which seem to have a better record (for now).

The scandal, which Cobrapost broke by making one of its scribes pose as a frontman for a politician with two (fictitious) wives who wanted to deposit their surplus cash with the above institutions, has come at a time when the RBI was planning to issue a series of bank licences to private players for the first time in nearly 10 years.

Bidders for these new licences, which are scheduled for the summer, are likely to include big business houses like Tata and Birla. Their entry into banking was being seen as injecting much-needed competitiveness in the sector.

However, allowing conglomerates into banking is also likely to create conflicts of interest between their financial arm and other companies.

The Cobrapost report alleges that money laundering was being brazenly promoted by the accused banks as a legitimate financial product, complete with a ‘standard’ set of procedures.

The colour of money is usually black and white in everyday transactions in India, with a huge undeclared (and therefore untaxed) sum supporting the more modest recommended amount on paper.

Private banks in India have increased the number of players in the sector, but this is counter-productive if they are going to flout all the monitoring controls.

Money laundering by banks is a covert form of thievery that cannot exist without both gross negligence and connivance by senior officials.

During the recently released budget, Finance Minister P Chidambaram acknowledged the existence of unaccounted money in India, saying “People, companies and public sector units (PSUs) are sitting on piles of cash. What I intend to do now is that I will ask them every quarter where they are investing. In case they have no plans, I will ask them to let the government utilise the cash.”

If he looks hard enough, the minister will surely find some of these piles building up in private sector banks that are hiding in plain sight.