Bank Scam: Impact on lending to MSMEs in India

Rs 13000 crores PNB scam is causing systemic damage to lending to businesses and it is feared that MSMEs may suffer the most.

Punjab National Bank(PNB) scam of Rs 13000 is still occupying centre stage of debate in political level and media leading to the prevalence of negative perception about the functioning of public sector banks(PSBs).

Echoing the sentiments, industry bodies like ASSOCHAM and FICCI have voiced their concern on the developments and requesting the govt and regulators to act fast on reforming these banks including improving technology applications to prevent recurrence of such incidents.

On the other hand, bank employees are feeling demoralised due to persisting negative campaign and it is feared that continuing gloomy situation may decelerate further lending to businesses as more and more bankers may become risk averse.

It is true that whenever big scams like this one surface, the banks are coming under the intense scrutiny of processes and procedures. It happened in India in the year 1992 post stock market scam as well as post-Ketan Parek scam in 2001. These led to improvements in the functioning of  Banks.

Unfortunately, political leadership and opinion makers are engaged in creating a negative perception of all the public sector banks. It is feared that debates and discussion surrounding PNB scam are leading to rupturing of the relationship between the customers and banks. Banks are becoming too rigid in dealing with the issues and challenges faced by the businesses.

Now the reports are emerging that there are no system-wide issues and the present scam is confined to only one bank. Hence there is no risk of contagion and run on the financial system. In spite of positive news, many HNIs and retirees are apprehensive of the safety of their deposit and stability of bank despite being supported by Govt for capital needs. Such is the level of misinformation campaign undergoing.

Banks are slowing down the lending activities during the busy season:

The sudden appearance of scam in the busy last quarter of the financial year has an unintended impact on borrowing plans of many business entities. Govt in the capacity as owner of these banks has advised the banks to review the portfolio and regulators have also raised their monitoring level. Banks are focussing on reviewing the internal mechanisms and health of their exposures. On the other hand, Vigilance Commission issued orders to banks to undertake transfer of staff who have stayed longer than stipulated time in one place. These created disruptions in assisting business to secure loans.

As a consequence, the legitimate segments are deprived to receive credit from the banks due to the paucity of time at the bank level

The scam is affecting lending to MSMEs:

The scam is surfaced in one bank. However, heightened concern around this scam and resulting negative perception about working of public sector banks have been causing the troubles to MSME segment.

MSME segment is likely to suffer most as the banks are becoming quite risk averse and they are mostly preoccupied with internal housekeeping.

MSMEs are just reviving from the impact of demonetisation and introduction of GST. At this juncture availability of credit is crucial for further progress.

MSMEs are by and large depended upon public sector banks for credit support baring exceptions of those who are having sufficient collaterals to seek a loan from private banks. However, such an opportunity is limited to large cities wherein the property value is high and other lenders are keen to lend. MSME segment’s dependency upon PSBs is much larger proportion and critical for the majority of SMEs in India.

Way Forward:

The scam has dented the image of the PSBs and also affected the normal banking operations. The segments like MSME who are critically dependent upon bank support are experiencing difficulties.

The scams are not new to banking industry nor we intend to justify that. Many countries have witnessed occurrence of such scams and Govts intervened to stabilise the banking business &  supported the larger economy. The best example is Global Financial Crisis of 2008. Active intervention of US Govt helped to avert the crisis to seep into larger economy and enabled uninterrupted credit flow.

We desire that Govt and RBI work in tandem to stabilise and lead the banks to move away from crisis.

In addition, Govt also should look at a longer-term strategy to overcome crisis like situation in the banking industry. Following few measures would help to manage the crises, overcome a repeat of scam occurred in PNB and save the MSME segment form credit squeeze:

Set up a robust mechanism to deal with such instances: In the instant case, Govt did not step into containing the spread of negative perception about the PSBs initially. Rather it became PR disaster and all PSBs are made to bear the brunt of negative campaign.  This has affected the functioning of the banks. Govt should have acted swiftly and minimised the impact. A PR mechanism to clarify the exact situation should be activated in such crises.

Introduce IT-enabled Offsite monitoring rigorously: Dedicated off-site monitoring mechanism which scans the transactions and has the ability to red flag the deviations is the need of the hour. This will enable the banks to identify system-wide fraudulent actions much faster. Govt may intervene and advise the banks to implement the robust offsite monitoring mechanism and define risk limits.

Build a new Financial architecture for MSME segment to create more access to credit: MSME segment has become extremely vulnerable to industry, economy,  global and even events happening in the financial sector. These are becoming more severe in causing disruptions. Given the importance of MSME segment and vulnerability of the segment to these frailties, Govt may bring out an enduring financial architecture that should facilitate MSMEs seek credit support irrespective of whether it is public sector or private.


Scam s like the one seen in PNB has rattled the lending business in recent weeks and many small businesses suffered a delay in access to credit. Policy makers need to work on a mechanism to prevent such scam as well as create an architecture for MSMEs to avail credit uninterrupted.