COMMENT: When govt comes hunting for villains, banks will be easy prey

Over the weekend the Finance Ministry sent a strange missive to public sector banks and to the Indian Banks Association telling them to strictly segregate deposits coming in the form of new and old notes and reflect it correctly in the customer's counterfoil and in their books.  The note, however, ended politely, thanking bankers for their extra work to implement the demonetisation policy. The government's underlying suspicions were unmistakable. It suspects bankers are trading deposits in new notes with those who want to launder old notes.The note underlines the quandary faced by the government. On one hand, it needs banks to hold the public fury till enough currency notes are printed. It needs the banks in its new mission of digitisation. And it will need the banks after the demonetisation, to cut interest rates and push loans. On the other hand, if the demonetisation policy backfires, it needs a scapegoat.It is not fair to call bankers scapegoats. Some of them have been black sheep. Else, it would not have been possible for large amounts of unaccounted cash to come so easily into the banking system. Stories in the media indicate varying degrees of collusion. At the extreme, one hears that vans reaching banks get cleaned out for some local contractor or politician or muscleman even when the branch's shutters are down for the queued up customer. Bankers talk in hushed tones about relationship managers and  wealth managers "obliging" high networth clients with ways of depositing their cash so as not to lose the client. Some large corporates who need government permissions routinely keep cash. These companies, sources say, have sought help from banks to manage their cash. As one banker put it, corporate bankers have become retail bankers to ensure they retain their corporate clients.There may be more petty theft as well. Banks have robust processes to check cash going into the vault. A string of counting and counter signing is needed by the manager and the cashier. But the locker space and processes designed for "x" crores may show some wear and tear when the amount is 20x, as a Credit Suisse report points out. This report says there could be a discrepancy between the cash taken as deposits and the actual old notes tendered by the bank to RBI, a discrepancy which may be discovered later. Such a discrepancy will have to be booked as a loss by the bank.Thus far the common voter has backed the PM's fight against corruption. But patience of the same voter wears thin when there is no end to the queues and when he hears of large hauls of new notes with a corporate honcho or a fraudster. The government is correctly trying to deter bankers from such frauds by raising the pitch against bankers. CNBC TV18 reporters are picking up from government sources that the Income Tax and the Enforcement Directorate are keeping a close vigil on banks across the country, especially on branches with higher deposits. The IT department is sending decoy customers to detect any suspicious activities. Separately, the economic intelligence wing of IB has also been monitoring over 500 bank branches of PSBs, private banks. The PMO issued a statement today saying the IB has submitted its report which the government may make public. It said it is also planning criminal action against errant bankers.These statements indicate that after the bulk of the notes are exchanged the government will turn its attention to corrupt bankers. In fact, if the amount of unreturned cash is too low on December 31, the opposition and critics will certainly sound the drumbeat. An embarrassed government may go into overdrive to look for villains.The villains are actually all over the place: Many contractors, hoteliers and others in informal occupations have paid 3-4 months advance salaries to their employees so that the burden of laundering is shared. Petrol pumps, we are told, shared a lot of their "new" notes with those trading in old notes. In the labourer areas of Mumbai a 20-30 percent premium for new notes was apparently widely circulated word-of-mouth to drivers, maids, cooks and other workers in the area. Separately, an army of touts have meandered their way into laundering money through small accounts - Jan Dhan or otherwise. Temples and dargas have been the other centres of note exchange. But in each of these cases, there is likely to be an obliging banker at the end of the trail. No matter whom the government hunts, it will be hunting a banker as well.The banking sector had had a long lean patch. It has suffered the consequences of political and bureaucratic frauds in coal and spectrum, from project delays due to environment and other clearances and from the global slowdown in commodities. The RBI's asset quality review was to have brought poison out once and for all.Even as the banks were hoping to limp back to normalcy and resume their lending, comes the demonetisation shock. If this process results in a renewed spurt of investigations on bankers, the sector will once again develop withdrawal symptoms and the one advantage of demonetisation - lower rates may also not help bring back greater lending and more growth.The finance ministry's note points to a fundamental contradiction in the government's war on corruption. Many of its own soldiers are compromised. The IT department is long known to be compromised. The government tried to rely on bankers. But such is the power of several lakh crores of black money, that it has corrupted many a cashier and branch manager too. The irony of demonetisation is that whereas the process was intended to clean out corruption, it has probably ended up adding to the army of the corrupt.