MUMBAI:  A $1.8 billion bank scam suggests there is one big owner yet to tame in India: the government. A newish bankruptcy code subdues influential tycoons by transferring some power to creditors. New Delhi's dominance remains troubling, however, evidenced by a metastasizing scandal at the country's second largest state-controlled lender.

Finance Minister Arun Jaitley broke his silence on Tuesday, complaining about a "lack of ethics" across parts of India Inc. Although he didn't expressly call out Punjab National Bank, it would be hard to misinterpret the target. Jaitley's finger pointed almost everywhere – auditors, rogue bank officials, supervisory agencies – everywhere, except at his own administration.

There is plenty of blame to go around for the massive fraud allegedly involving diamond billionaire Nirav Modi, whose lawyer has denied the accusations. PNB says two junior employees issued unauthorised letters of undertaking using the SWIFT financial messaging network to get overseas lenders to extend credit to firms linked to Modi and his extended family.

Jaitley also implied that the government is allowing lenders to manage their own affairs. That's true only to a point. Politicians have stopped telling banks when to lend and at what rate, but still interfere in other meaningful ways. For example, New Delhi appoints bank chief executives and influences board representatives, who are ultimately responsible for risk controls.

In many ways, this undermines the bankruptcy regime – modelled on Britain's – which sets clear parameters for how wealthy moguls must behave. They can no longer borrow excessively without impunity and creditors can now flex their muscles when debts are not paid.

The Punjab debacle makes clear, however, that it will be impossible to cut the crony cord completely if authorities ineffectually dictate governance at lenders funding the same tycoons that they are trying to restrain. To resolve that situation would require hiving off the government’s majority stakes in 20-odd banks.

Putting them at true arm's length from ministers is one option. Outright privatisation, which would make the banks more competitive, would be even better. Until then, India will have only fixed half its shareholding problem.

CONTEXT NEWS

- India Finance Minister Arun Jaitley on Feb. 21 decried "a lack of ethics" among sections of the country's business community and criticised inadequate oversight by auditors and regulators following a $1.8 billion fraud at a state-controlled bank.

- Jaitley did not refer by name to Punjab National Bank, where junior employees allegedly helped firms obtain unauthorised credit from overseas branches of mostly Indian lenders, but he repeatedly referred to "a stray incident."

- He said the country needs to examine "the lack of ethics that a section of Indian business follows", adding that internal and external auditors should examine whether they had "looked the other way or failed to detect" any wrongdoing. Jaitley also said "the supervisory agencies" needed to "introspect”.

- Firms involved in the fraud are allegedly linked to billionaire jeweler Nirav Modi and extended family members. A lawyer for Modi has denied the accusations.

- PNB shares have fallen around 30 percent to 118 rupees since the bank disclosed the fraud on Feb. 14, putting the bank's market value at about $4.4 billion.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

© Reuters News 2018