Can’t bank on this system

Sushma Ramachandran

ONE of the biggest global financial frauds has been unearthed in an iconic 123-year-old banking institution. The venerable Punjab National Bank (PNB), the country’s second largest public sector bank, finds itself embroiled in investigations into illegal transactions by multiple law enforcement agencies. Celebrity jeweller Nirav Modi, who has been visibly mingling with the powerful elite in this country and abroad, has vanished after siphoning off a mind-boggling Rs 11,400 crore with the help of bank officials. 

There is a frenzied media hunt to locate the jeweller and his clan which has conveniently disappeared to one of their many foreign residences. Meanwhile, back in India, junior bank officials have been arrested and details of the scam have unfolded. The fact that such a massive deceit went on for over seven years with the connivance of just a few bank executives is difficult to believe even for the most credulous of us. It implies there was simply no supervisory activity by senior officials nor was there any audit of bank transactions.

In the case of the Satyam fraud, the malfeasance had occurred at the very top of the chain, hence it was obvious that a cover-up was a relatively easy affair. Even then, the audit company’s role had come under the spotlight and complicity was presumed in the swindle. As far as this case is concerned too, the focus needs to be expanded to include those at the helm of affairs rather than the foot soldiers who did the operational work. Some basic questions need to be answered. First, what kind of system allows a single official to stay in a key position for years without any supervision. Second, how can the system for inter- bank transfers be operated by individuals without any review, again for years at a time. Third, do other banks that provide credit based on letters of understanding (LoU) not have any regular communication with the bank issuing LoUs, especially when these are of a longer duration than usual? These simple queries are obviously only a starting point. 

The role of politicians in the scam is also under the scanner, with both the BJP and the Congress hurling accusations against each other. The fact is, the scam began during the UPA era in 2011, but continued after the NDA government came to power. Clearly, the colour of money does not distinguish between political parties as Nirav Modi has been seen in photographs with both BJP and Congress leaders.

Apart from political connections, what is of relevance is the fact that the banking system seems to be mired in hoax schemes. Data mined by Reuters reveals that  within a five year period from 2012 to 2017, there were 8,670 bank fraud cases involving an estimated $9.58 billion. The Nirav Modi type scam may thus be the tip of the iceberg as far as such rackets are concerned. Both the RBI and the Central government need to come down with a heavy hand on public sector banks and ensure that systems are completely revamped. 

It has become a truism that crony capitalism is one of the major reasons for these frauds. Loans are given to those who have close ties with the government of the day without asking any questions. Vijay Mallya is a case in point where his brand was taken as collateral by an entire consortium of banks. This cosiness between the political leadership and the banking system is, in turn, blamed on nationalisation and government controls. The sad fact is that banks are not likely to be privatised anytime soon.  Neither is there any guarantee that this will solve the problem as private banks can also be defrauded, a prime example being the collapse of the Barings Bank of the UK.

It is thus for the RBI and the Finance Ministry to restore the people’s faith in the banking system. The central bank has just issued a set of guidelines to prevent the formation of NPAs at the outset by strict monitoring. Recapitalisation of banks as well as measures to recover funds from big defaulters had also recently come as a big relief, raising hopes that the mountain of  Rs 7 lakh crore of NPAs would gradually be whittled down. These hopes seem to have been dashed. 

What is even more disturbing is that the scam occurred in a bank that was the only one set up over a century ago with entirely Indian assets. The PNB was established in Lahore in 1894 through the initiative of freedom fighters like Lala Lajpat Rai and Tribune founder, Sardar Dyal Singh Majithia , who became the first chairman. It survived the tremors of the depression era and acquired a reputation for stability and reliability. It even survived the Partition by shifting headquarters from Lahore to New Delhi and managed to compensate many account holders, despite few documents  left with refugees from west Punjab. It was seen as a financial bastion of Independent India and account holders included the likes of Jawaharlal Nehru and Mahatma Gandhi. After nationalisation in 1969, the bank gradually expanded through mergers with other smaller banks. It has now become a pan-Indian entity,  second only to the State Bank of India in its reach and network.

The scam having taken place, however, it is imperative that the investigations reach a satisfactory and rapid conclusion so that the real perpetrators of this complex fraud are brought to book. Other banks cannot divest themselves of responsibility as the operation could not have continued for so long, and so successfully, without complicity. This will also determine the complex issue of liabilities. If the other banks have been complicit, the liability of PNB will be restricted to some extent. It is for the RBI to step in here and take a view on this critical issue as quickly as possible.

With the unearthing of this hoax and the prospect that similar frauds may have taken place in other banks, the faith of the general public in the banking system is at its lowest ebb. Whether it is the Nirav Modi or Vijay Mallya case, the responsibility for the nation’s economic losses lies on the shoulders of the political leaders. Unless they make a genuine effort to clean the Augean stables of the public sector banks, the country’s vital financial systems may ultimately collapse in the long run.