There is a debate in India on black money. In order to curb it, the government banned Rs. 500 and Rs. 2000 notes. According to estimates, there is $ 6–7 trillion of black money in tax havens across the world. India’s share is estimated at $152-181 billion, a sizeable portion of Indian economy.
A big chunk of the supposed black money comes from cash hoarded by businesses, which took loans and did not pay back, affecting capitalization of banks and leading to the worst-ever financial crisis. Bad loans grew to Rs. 3,41,641 crore, destroying the roots of India’s Rs. 95-trillion banking sector. Total NPAs as a percentage of total loans grew from 2.11% to 5.08%. Eight of 10 banks are from the public sector.
Bad loans occurred mainly due to diversion of funds to unrelated business and fraud
To curb black money, one needs to cut the roots of the problem. Wilful defaulters get away because the trail is lost after loan is sanctioned. A notable incident was of United Breweries and Kingfisher Airlines chairman Vijay Mallya, who owes Rs 9,000 crore to 17 Indian banks such as the State Bank of India (SBI). As the country moves towards a Digital India, Enterprise Resource Planning (ERP) software can play a key role in preventing bad debts. The ERP is a digital gateway to transactions. With the help of new technologies, tracing black money would be less painful. According to a study by international research firm Ernst and Young among Indian bankers, 87% felt that NPAs occurred because of diversion of funds to unrelated business that is fraud, whereas 64% attributed it to lapses in diligence.
Banks are not able to control black money stashers
Industry experts say the main problem is that banks cannot monitor and check finances of enterprises thoroughly as the banks have no visibility on their operations. The data with banks is not enough to authenticate and verify claims. Thus, banks need technology to monitor enterprises continuously as well as remove this source of black money from the economy.
This can be done through a 2-pronged approach: ensuring transparency as well as implementing automation and digitalization. Banks need to keep tab on enterprises’ key transactions: inventory, invoices, balance sheet, account receivables, etc. Banks can prevent enterprises from unauthorized use of the money if data is available to them and control wilful defaulters and prevent black money.
“ERP software can assist in preventing hoarding of black money in the economy. It can stop fraudsters and other unscrupulous people in their tracks,” said Shashank Dixit, CEO, Deskera, a global cloud-based ERP provider. According to a survey conducted by the same organization, 62% of Indian enterprises feel that ERP could curb black money.
Banks must make it mandatory for enterprise to install the ERP software. All transactions would be under scrutiny on real-time basis, if ERP software is integrated with banks’ systems. And then financial institutions would have visibility on transactions and help the Digital India initiative and root out black money.