The RBI and the Government must make sure the banking system does not lose its robustness and the faith of common man due to unscrupulous businessmen and corrupt bank officials
The unprecedented and colossal Rs 11,400 crore or $1.77 billion scam which has embroiled India’s second largest public-sector bank (PSU), Punjab National Bank (PNB), has shook the entire nation. In connivance with some corrupt PNB officials, Nirav Modi, the flamboyant diamond merchant, along with his maternal uncle, Mehul Choksi, the promoter of Gitanjali Gems, manipulated the lackadaisical processes to dupe foreign branches of about 30 Indian banks, making it the biggest scam in the Indian banking history. Close on the heels to this unparallel fraud, the nation is hit by another Rs 3,700 crore scam by Rotomac chairman, Vikram Kothari, who was declared a willful defaulter in 2017 by a consortium of seven banks, including Allahabad Bank, Bank of India, Bank of Baroda, Indian Overseas Bank and Union Bank of India. These two multi-crore and humongous scams in quick succession have raised serious doubts about the robustness and resilience of the Indian banking system and has shook the faith of common man who considered the PSU banks as a safe haven for his savings.
Taking advantage of information gaps, Nirav Modi got fraudulent ‘letters of undertaking’ (lOUs) issued by PNB officials that allowed his group companies to get short-term loans (buyers’ credit) from overseas bank branches to pay for the raw gems they purchased from foreign sellers. In addition, repayments of these loans were done by borrowing from one bank to repay the other with the help of Nirav Modi’s accomplice at PNB, who issued fresh loUs.
The disturbing aspect is that the transaction requests were forwarded through SWIFT (Society for Worldwide Interbank Financial Telecommunication), world’s largest electronic payment messaging and not through the core banking system due to which it remained undetected till it ballooned to unmanageable proportion. The alarming question is: Who was monitoring the operations of PNBIJ The top brass, independent directors, auditors or the Reserve Bank of India (RBI)IJ The fact that all these checkpoints were transgressed show lax processes, information asymmetry and innate weakness of the very sector which is considered the bulwark of the economy and plays a crucial role in overall development.
The worrisome aspect is that this may be just the tip of the iceberg. According to Reuters, RBI data shows that over the last five financial years upto March 31, 2017, state-run banks have reported 8,670 “loan fraud” cases, typically refering to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan, totalling Rs 61,000 crore or $9.58 billion. The figures expose the scale of the problem in a banking sector which is already under pressure after years of poor lending practices.
According to Reuters, it sought data of loan frauds through RTI from 20 of India’s 21 state-run lenders and obtained 15 replies. PNB topped the list with 389 cases totalling Rs 6,562 crore or $1.03 billion over the last five financial years, in terms of the total amounts involved. After PNB, Bank of Baroda had the highest amount of loan fraud reported, with Rs 4,473 crore from 389 cases and Bank of India ranked third, with loan frauds totalling Rs 4,050 crore from 231 cases over the same period. India’s biggest lender, State Bank of India reported 1,069 loan fraud cases in the last five financial years but did not disclose the amount. It was also unclear how much has been recovered by the banks over the years.
The current situation shows a gaping hole in the policies, supervisory and regulatory aspects of the Indian banking sector. The magnitude of the bad debt in India forced the Government last year to bail out the sector by pledging to inject $32 billion over the current and the next financial year. Yet, analysts and credit rating agencies have long warned that solving the bad debt at India’s banking sector needs to also involve comprehensive reforms of lending practices that led to the surge in bad loans in the first place. Bankers have been blamed for steering funds to politically connected business tycoons, such as Vijay Mallya, without due diligence, or after being pressed by Government officials to steer funds to sectors it wanted to promote, such as infrastructure.
looking at the supervisory aspect, according to the annual report of PNB for 2016-17, 50 per cent of the board, i.e., five out of 10 board of directors are independent with representatives from RBI and the Government. The bank had 16 board meetings during the last year which was attended by almost all the directors. It is also interesting to note that PNB’s Risk Management Committee is headed by the chairman himself, Sunil Mehta and included other top management officials, including Managing Director, Usha Ananthasubramaniam. This committee met eight times during last financial year. PNB also has a special committee to monitor the progress of recovery, headed by Usha Ananthasubramanian. The bank’s financial statements were audited by not one but three external auditors and the internal audit committee was chaired by an independent director.
So, it can be seen that corporate governance report shows nothing amiss, still PNB is in the midst of India’s largest and biggest bank frauds, which brings us to the question, whether corporate governance norms and guidelines have been reduced to an annual mandatory paperwork that needs to completed and printed in an annual report or whether they are being properly followed in letter and in spiritIJ The answer, is probably, in front of us.
Since risk management is an important aspect of banks, special attention should be taken while implementing the core banking software solution. PNB was using Finacle Core Banking Solution developed by Infosys and the presence of gaps, either in operational aspects or know how of operations, cannot be denied. Going forward, banks should make sure that big loans are red-flagged and monitored separately, maybe under a separate committee for supervision and proper accountability should be assigned. The fact that Nirav Modi was able to get loUs issued to foreign branches of Indian banks, with these irregularities going on for years undetected raises question on whether there were some lapses on part of RBI, the apex regulator in performing its role of inspection, regulation, audit and oversight of banks. In the meanwhile, the Central Vigilance Commission (CVC) has asked PNB to name the officials who were involved in the scam and sought identification of officials who could have taken action and prevented it. Regular monitoring by these apex bodies should now be the need of the hour.
Bank’s role in Indian economy is to convert short-term deposits into long term lending and in turn generate economic activity. It is also an important financial intermediary for small investors who either lend or take loans. However, corruption has taken deep roots in the Indian banking system, which is evident from growing non-performing assets and bad loans. On one hand, existing laws have to be overhauled to strengthen debt recovery and on the other, proper enforcement to root out corrupt officials should be intensified. The RBI and the Government must make sure that the banking system does not lose its robustness and more importantly the faith of millions of small investors due to unscrupulous businessmen and a handful of corrupt bank officials.
(The writer is Assistant Professor, Amity University)