NiMoNia

Sanjeev Sharma in New Delhi

If you owe the bank $100, that's your problem. If you owe the bank $100 million, that’s the bank’s problem, said American oil tycoon, J Paul Getty. The Rs 11,400-crore fraud in Punjab National Bank (PNB), the country’s second largest, has shaken the insipid economy, the stress-prone PSU banking system and the faith of customers, leading to national outrage. Key perpetrators, diamond jewelers, Nirav Modi and Mehul Choksi, are absconding. And as if it was nothing, the Rotomac fraud erupted leading to the arrest of owner Vikram Kothari.

The indignation of the common man stems from the myriad checks imposed by banks, ranging from frequent Know Your Customer (KYC) checks to Aadhaar linking and multiple document supervision. The common customer knows very well how s/he is hounded by banks on missing even a single EMIs or a credit card payment. The customer also knows how the rich fraudsters have time and again looted public money and fled the country.

“My experience as a retail borrower prompts me to think that big borrowers are favoured by banks,” says tax and investment expert, Balwant Jain. For personal loans or credit card dues, the banks send collection agents to your house to pressure you for repayment. But nothing of that sort happens with big borrowers, he said.

“Even when one has to get a bank guarantee, he is asked to make a fixed deposit as collateral of higher value. How can the PNB issue not only one but so many LOUs (Letters of Undertaking) without obtaining any collateral,” Jain said.

The basic flaw

Experts say these incidents stem from systemic issues. Says Amol Kulkarni, Fellow, CUTS International: “We believe it would be a fallacy to view the PNB (and Rotomac) cases in isolation and detach them from systemic concerns affecting broader financial sector. The government and regulator’s misplaced priorities and short-term approach have taken a toll on consumer trust”.

Vulnerable consumers, he says, are expected to comply with stringent regulatory requirements to access formal financial services and make do with inefficient grievance redress mechanisms. “The misplaced priorities of the government are equally responsible,” he said. 

“At a time when banks are reeling under the burden of unprecedented non-performing assets (NPAs), the banks are levying unreasonable charges on ordinary transactions. Grievance redress mechanisms are pathetic. The regulatory focus should have been on modernizing and professionalizing banks’ management, promoting transparency and accountability, and moving from ‘consumer beware to seller beware’ standards,” said Kulkarni. Several expert committees have made recommendations, but the government remains indecisive,” he said.

RBI, LoUs & SWIFT

In the case of the Nirav Modi fraud, letters of undertakings (LoUs) were fraudulently issued on the SWIFT system which was never linked to the core banking system (CBS) of the bank. It is astounding no red flags went up and none of the numerous audits detected the scam.

The All India Bank Employees Association (AIBEA) has demanded “a parliamentary probe to get banks rid of ‘NIMO’nia ailments in future.” AIBEA general secretary CH Venkatachalam says the fraud has raised questions on technology issues, supervision, audit and internal controls, besides the RBI role. 

The AIBEA has posed some questions to RBI. “How is it that the RBI, which carries out a regular audit of the banks, did not even detect the fraud, despite the volume of money involved?” Was the software SWIFT that was used for the fraud approved by the RBI for the banking sector? If not, why did the RBI not examine this thoroughly and evaluate the risk?”

The RBI has clarified its position, saying it had alerted the banks at least thrice since August 2016 in a confidential manner on the possibility of SWIFT misuse. The RBI said in a statement that the risks arising from the potential malicious use of the SWIFT infrastructure, created by banks for their genuine business needs, has always been a component of their operational risk profile.

Calls for privatization

People familiar with the regulatory landscape in the banking sector say that over the years, RBI’s focus is skewed much more towards monetary policy. It has ignored the core function of inspections for ensuring the financial health of the system. The central bank was earlier appointing auditors for the banks. Over time, the banks get to choose their own auditors, leading to conflict of interest.

Also, diamonds are not bankers’ best friend. Sources point out that valuing diamonds and giving credit against the value of the asset has always been a tricky issue. The repeated frauds in public sector banks have led to calls for privatization. Industry body, Assocham has said that the PSU banks, ironically, are slipping from one crisis to another. There is a limit of the government bailing them out at the cost of taxpayers’ money. The Ficci has recommended privatization of public sector banks.

The PNB fraud may impact sentiment just after the government had a massive Rs 88,139 crore public sector bank recapitalization package with a potential to boost credit offtake. The government has linked it to a reforms package that includes curbing imprudent lending to the corporate sector.