In the wake of the Rs 11,300 crore ($1.8 billion) Punjab National Bank (PNB) scam allegedly involving diamond merchant Nirav Modi, Union Finance Minister Arun Jaitley on Tuesday said the state was duty-bound to ensure those cheating the system are brought to justice.
He said the scam had highlighted the failure of the Indian banking regulator, on whom it is now incumbent to institute a mechanism to ensure that such scams do not recur.
"What are our auditors doing? Both internal and external auditors really have looked the other way or failed to detect."
"... it is incumbent on us as a State... to make sure the country is not cheated," he said in his first public comments on the fraud while addressing the annual meeting of the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) here.
Jaitley -- without naming the PNB fraud that has rocked the banking system -- also said the scam posed an important question -- "lack of ethics that a section of Indian business follows".
"Therefore, call it a moral hazard. Any system of banking functions on trust... but this blurred itself out when a not-so-ethical section of society did not feel the responsibility to pay (back)," the Minister said while referring to non-performing assets (NPAs), or bad loans, of government banks which are proving to be a major roadblock in the revival of private investment and affecting the state's capacity to fund development.
He wondered whether the bank management had been "found lacking" in this case.
"On the face of it, the answer seems 'yes, they were'. They were also found lacking in being able to check who amongst them were the delinquents here."
The NPAs in the Indian banking system have crossed a staggering Rs 8 lakh crore, of which the public sector banks (PSBs) account for over Rs 7 lakh crore.
The Finance Minister also noted how the collusion between banks and scamsters had glaringly highlighted the failure of the system of checks/controls, both internal and independent.
"There is also an important challenge where the supervisory agencies have now to introspect as to what are the additional mechanisms they have to put in place to make sure that stray cases don't become a pattern and the menace is nipped in the bud," he said.
"I am sure the profession of Chartered Accountants and those who control the discipline of the profession will start introspecting and see what are the legitimate actions to be taken," he added.
Describing the "developments as costing the country and the taxpayers", Jaitley said this "impinges upon the bank's capacity as a lending institution and therefore, it obviously impinges upon developmental finance."