Economists on Bank Scams

The scale of the recent bank scams and the potential losses faced by banks holding non-performing loans given to some large companies and individuals, has shocked all of us. However, we are concerned to note that this has become an excuse to demand the privatisation of publicly held banks. While it is true that the current scam involves Punjab National Bank (PNB), the second largest public sector bank, the basic cause is very clearly the inadequate and faulty regulation and monitoring of the banking sector. This affects all banks, regardless of ownership. But in a curious turn, fraud that was led by and which benefited private players pursuing super-profits at any cost, is being made the reason for handing control of the nation’s savings to the private sector.

Poorly regulated private banks are even more prone to scams and failure, as the financial sector is rife with information asymmetries and market imperfections. Private profit orientation generates incentives for managements to exploit loopholes in rules, and engage in risky behaviour, as shown by United States and European bank behaviour leading to the Great Financial Crisis of 2008–09. The bailouts they then require tend to be even more expensive for the public exchequer, because bank runs have to be prevented.