Who is To Blame For PNB Fraud?

PNB Fraud picThe blame game is on and various parties are trying hard to indict each other for the INR 11000 crore fraud. If there is something totally nonsensical in the aftermath of the unearthing of the scam, it is blaming either of the two major political parties, BJP and Congress for what has happened. While the BJP says that irregularities started when INC was in power, INC says Modi-led government deliberately allowed the main accused to flee the country.

I ask, was the nation’s second largest bank run by Congress party members from 2011 till 2014, or was it run by bank’s own management? On the same lines, even if the main accused was present in Davos during Mr. Modi’s recent visit, was the PM not accompanied by other businessmen? After all he was there for World Economic Forum plenary session and the presence of representatives of largebusiness houses (main accused’s diamond business is the largest jewelry brand to have emerged out of Asia in past decade) was indispensable?

Now, it is high time that we look at the financial fraud without any reference or linkage to political landscape of the country. Indian banking space, especially public sector banks, is in the midst of an existential crises and if no corrective actions are taken on an urgent basis, this crucial pillar is set to emerge as the biggest financial and economic burden – and it is a now or never situation for those who formulate policy at the highest levels. Swift policy action, not politicisation, is the way out.

Let me also first bring to everyone’s notice that RBI in its many directives to Scheduled Commercial Banks has warned them on ‘Precautions to be taken in case of Letter of Credit (LC)’ where it has said that even discounting banks must take due precautions. A fragment of RBI’s directive,dated July 1, 2015,is reproduced here.

2.7 Precautions to be taken in the case of Letter of Credit

2.7.1 Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should they discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients. In the case of LCs for import of goods, banks should be very vigilant while making payment to the overseas suppliers on the basis of shipping documents. They should exercise precaution and care in comparing the clients. The payments should be released to the foreign parties only after ensuing that the documents are strictly in conformity with the terms of the LCs. There have been many irregularities in the conduct of LC business, such as the LC transactions not being recorded in the books of the branch by officials issuing them, the amount of LCs being much in excess of the powers vested in the officials, fraudulent issue of LCs involving a conspiracy/collusion between the beneficiary and the constituent. In such cases, the banks should take action against the concerned officials as well as the constituent on whose behalf the LCs were opened and the beneficiary of LCs, if a criminal conspiracy is involved.

Did any bank read this directive, let alone implement it in letter and spirit?

PNB, in its letter to peers that has warned them of the fraudulent modus operandi of the accused officials and companies, has clearly stated how transactions through SWIFT, the international payment system, bypassed CBS of the bank and thus allowed the scam to run for years without being detected.

Now that everyone knows that without the connivance of bank’s officials, the incident would not have happened, we need to introspect. Letter of Undertakings were issued illegally and this word ‘illegally’ indicates a lot. First, this had been happening for at least past 6-7 years or even beyond. Should those participating in bank’s internal audit, statutory audit, concurrent audit and RBI’s audit during all these years not be investigated? Even if they weren’t complicit, they failed in their respective jobs.

Second, if the so-called SWIFT system is so opaque, why was this not checked and corrected, the Board should have been made aware of this vulnerability. The staffer in-charge of the SWIFT system must have reported to higher management the risks posed by it. There exists a special risk management team with a designated head and it was the duty of this team to check if there was any such loophole that could cost the bank a third of its market value from a single branch.

The most crucial point, however, is that not only PNB, but almost every PSB is riddled with lack of sense of duty in the staffers. I would say the problem with public sector banks is that they are ‘public sector banks’.

Events like SBI posting its first ever quarterly loss in 17 years and the central bank reprimanding banks to give clear picture of their books will only see an upward trend in coming days. When did you last see the stocks of PSBs gaining? It was when the government announced a INR 2.11 lakh crore recapitalisation package in the month of October 2017 to help stimulate credit growth; thus it was no operational feat on the part of banks, it was the exercise to save them from being totally crippled with respect to extending loans that lifted confidence of investors in their stocks.

Is there any long-term solution?

When divestment is talked, we only recognize sick companies as eligible for this exercise. But if any prudent corrective measure has to be taken when it comes to PSBs, it is considering divesting government stake in PSBs and pushing them toward good corporate governance. Yes, neither any political party nor a few officials at the PNB Mumbai branch are responsible for the sick banking sector of India; it is the lack of good governance that is squarely blame.

Moreover, what purpose is this stake in PSBs serving? PSBs rarely pay dividends to government; on the contrary they seek recapitalisation that comes out of budgetary resources, an area where government is already struggling with missing the fiscal consolidation target. I would only blame lack of or even absence of good governance in PSBs for all the negative news emerging out of banking space.

And here is thefeasible solution. If government thinks divesting stake in PSBs is too bold a step, form a government trust free from interference of bureaucrats and ministers. Just like Tata Trusts. This may need a few tweaks in some laws since trusts are now not allowed to hold equity. Divest shareholding in PSBs and place it in this trust with members who must be experts and must come from private sector. Let bankers handle the banking business, and handle it in accordance with globally accepted norms for good governance.

Give a mandate to this trust to initiate much needed reforms in governance in PSBs. Bad loans, frauds, scams running into billions of dollars are all products of bad governance and flouting of even basic governance norms by banks staffers at all levels. Bring governance, only then you can expect banking sector to come out of this seemingly near-irreparable mess. Else, wait and watch the downfall.

(The article published in daily newspaper “The Statesman” on 18th February 2018)

Who is To Blame For PNB Fraud?

95 thoughts on “Who is To Blame For PNB Fraud?

  1. Chandra Sekhar

    It may be right that although government does not have active participation in day to day activities of bank, they still influence project financing and compel banks to lend to weaker companies.

    Reply
  2. Devendra Tambe

    If at all the government is serious about state owned banks, they must introduce stricter controls and vigilance inside banks otherwise we may have some failed banks in next couple of years.

    Reply
  3. aaditya loya

    Why is every defaulter allowed to flee the country? When we have such friendly relations with UK, USA and other countries, cant we get back the defaulters?

    Reply
  4. Rajiv Patel

    How can one blame anyone at this point, we need to know the complete details of this event. Were the people who approved the restructuring and loans pressured from their higher ups and were these higher ups pressured from their political bosses? One needs to remember that PSUs are at the beck and call of their politicals masters. Air India is an example of this that has received significant press coverage. Once the extent of the rot is identified then the blame can be assigned. Anything other than that would be a coverup. Again past instances have proved that coverup is nothing new.

    Reply
  5. Hardik Parmar

    India’s public sector banks are on the brink of collapse and if the government doesn’t take a wise step people and investors might lose their confidence in them which will lead to bank defaults.

    Reply
  6. MALLIKARJUNA RAO S

    Complete failure of our laws and Judiciary , our laws encouraging such people can do fraud and can take bail and roam anywhere in the world , only normal civilians they will charge not high profile people , It’s proved several times and again it’s going to be proved…. 🙂

    Reply
  7. Mayur Agarwal

    From lending to keeping savings, banks perform the most vital function in any economy. It is assured that government of India will not let any bank to fail since this will erode confidence in government.

    Reply
  8. Darshan Dave

    I feel pity on Congress party that is saying Nirav Modi is being saved by BJP. If Congress had been vigilant the fraud would never have come up since it began in the UPA era.

    Reply
  9. KARAN NAGAR

    The legacy of our government banks is at stake and they must introspect was is going wrong in their functioning that so many officials are being involved in scrupulous activities.

    Reply
  10. Dinesh Kumar Anchal

    THE TOP, because TOP drives such policies which makes them happy in having money and corrupting the system so badly none can correct that. Because crime & corruption are (civilized) tools to downward/lower one to do so putting his own self as first. They need surgical cutting time to time or auto system to be in place to reduce human touch or inter action particularly money allocations cases. Evaluate & surveillance these all the time by different persons & 360 degree level. NPA must be sold out to recovery money even at lower price to earn inventoried cash

    Reply
  11. Naresh Sharma

    Too much emphasis on the mere human beings! And leaking processes where Everybody can do Everything. In the nutshell, the TOP is hardly carrying the vision, of Reality and Changed World. With all courtesy to the Bank Managers, they are in perfect position to burgle the Bank – the only things which can save is How their actions are monitored in real time!!

    Reply
  12. Abhi Mishra

    First banks were complicit in allowing people to get their money converted during demonetisation. Now reports are coming that fraud loans were given without collaterals. Banking on collapse.

    Reply
  13. Amar Duggirala

    Fact is that current set of rules are sufficient to prevent or detect such frauds at early stages. Introducing SOX in 2002 was also a very complex yet strong mechanism to prevent scandals but that made auditors play the ball at their instance. Now we all know that it is a nexus between corporates (company+audit firms) and investors with vested interests. Moreover the root cause is of making money by any means and this is because human wants are unlimited. This isn’t going to stop and going to get worser. Now even laws are not that effective in implementation.

    Reply
  14. Gaurav Singhal

    Even private sector banks are no good. Look at NPAs of ICICI and Axis Bank. So it is wrong to say that only government banks are at fault. Defaulters exist everywhere and this is part of business.

    Reply
  15. Ananda Goswami

    Sad but true commentary. RBI directives ignored. Almost zero accountability of bank managers, software that lets two systems run in complete ignorance of each other. The answer is we are to blame for the intellectual bankruptcy of our leadership. So should the FRDI be made law? I think not.

    Reply
  16. Raja Malan

    Having good number of years exposure to India industry at various capacity, you pick up company of your choice and run random check, you will find skeleton of scam, fraud and manipulation. Bank trade finance dept are most corrupt dept. They can coach you how to work between loophole if you grease their palms.

    Reply
  17. Barath Shankar

    No government, congress or BJP led, is serious about functioning of government institutions. FCI, banks and all others are neck deep into corruption and inefficiency. Why not privatise everything.

    Reply
  18. K Stephen Daniel

    Only politicians. Why such scams are not seen in private banks? Mallya, Nirav Modi scams happened because politicians pressed the banks to give them huge loans. Had these officials opposed they would be sidelined by these politicians. Over the years these politicians have learned to operate without leaving any trace so that they are not caught. They give few thousands to voters and grab power. They hold too much power. They make the laws of the land. Because they themselves make the law, no one can lay their hands in them.

    Reply
  19. Manish Patel

    business man will always see how he could get best out of doing , Bank official is been paid to work as per RBI guideline with people money interest ……so more than a business man …..Bank official should be made accountable for this kind of fraud

    Reply
  20. Lalit Sharma

    Good day. I am certainly happy I discovered it and I will be book-marking it and checking back frequently.

    Reply
  21. Sithartha Gowtham

    Great task on this publish. I enjoy the way you displayed your info as well as the way a person achieved it significant and also obvious to be aware of. Thanks a great deal.

    Reply
  22. Nikita shah

    Hi, all the time i used to check weblog posts here in the early hours in the break of day, because i enjoy to learn more and more.

    Reply
  23. Mk jais

    I quite like reading an article that can make men and women think. Also, thank you for permitting me to comment.

    Reply
  24. Chris Pitt

    Your article will surely be a great help to a lot of people. An outstanding blend of thinking and good writing.

    Reply
  25. Deepak Agrawal

    Thanks for that, the site looks fantastic and I am sure will be a great service to both locals and visitors.

    Reply
  26. Keshav maheshwari

    What a beautifully drafted article which has all the important points still its not boring.

    Reply
  27. TUSHAR kakar

    I wanted to thank you for this fantastic read.. I absolutely enjoyed every bit of it. I have got you book marked to check out new stuff you post

    Reply
  28. Kartik Langalia

    I am regular reader, how are you everybody? This paragraph posted at this site is actually good.

    Reply
  29. Krushna Ranaware

    Just wanted to say how much we appreciate the tremendous amount of hard work and effort you all put in to producing this website. It is a great credit to everyone and I am sure will be a great success.

    Reply
  30. Priyanshu kumar

    I wonder how come you get to know that this is the exact information that I have been looking for. Thanks a ton man.

    Reply
  31. Bhakt mittal

    I recently had a good fortune of reading your article it is really well written with updated information. I will be returning here often now.

    Reply
  32. James Kumar

    Hello th?r?. I could have sworn I have been to your blog befo?e but after browsing through a few of the posts I realized it i? ne? to me. Regardless, I am certainly ha?py I ?tumbled upon it an? I will be book-marking it and checking back r?gularly.

    Reply
  33. Talvinder Singh

    Congratulations Dr Gupta in the setting up of your attractive, informative and very professional website. Well done.

    Reply
  34. Kalahan Kaul

    Thank you, I have just been looking for info about this subject for ages and yours is the best I have found out till now.

    Reply
  35. Biswas Timshina

    Hi there to all, how is the whole thing, I think every one is getting more from this web site, and your views are pleasant designed for new users.

    Reply
  36. Aniket shetty

    Everyone loves it when individuals come together and share ideas. Great site, continue the good work.

    Reply
  37. Hemant Kumar

    Quality articles or reviews is the key to attract the users to go to see the web site, that is what this web page is providing.

    Reply
  38. Subramanian K R

    I am very happy to find this web site. I wanted to thank you for your time due to this fantastic read. I definitely liked every little bit of it and i also have you saved to fav to see new information in your site.

    Reply
  39. Jignesh Shah

    You definitely realize how to bring an issue to light and make it important. More people should read this and understand this side of your story.

    Reply
  40. Mafuzur Rahman

    Absolutely wonderful, well done everyone, what a great achievement. Here is to the future and success for everyone. Thank you all for your hard work, we know it will be ongoing and trust that you will get the appreciation and credit of putting such brilliant articles on the worldwide web. Looking forward to seeing it grow.

    Reply
  41. Praveen ankathi

    Great web site you have got here.. it is difficult to find high-quality writing like yours nowadays. I truly appreciate people like you. Take care..

    Reply
  42. Alind Chopra

    Hi there. I simply would like to give you a big thumbs up for your great information you have got right here on this post. I will be returning to your website for more soon.

    Reply
  43. Ameerudy awar

    Can I just say what a relief to discover someone that actually understands what they are talking about over the internet. You definitely understand how to bring a problem to light and make it important. More and more people really need to read this and understand this side of the story. I was surprised that you aren’t more popular since you most certainly possess the gift.

    Reply
  44. Dron Rathore

    Very soon this web page will be famous among all blogging and site-building users, due to it is pleasant articles

    Reply
  45. Lalit Shanker

    Hi there, yeah this post is genuinely nice and I have learned lot of things from it on the topic of blogging. thanks.

    Reply
  46. Azhar Kottaparambil

    Hello, I am so happy I found your weblog. I am really appreciating the commitment you put into your site and in depth information you offer. This has been so particularly generous with people like you to supply openly all that most of us would have offered for sale for an e book in order to make some dough on their own, even more so seeing that you could possibly have tried it if you ever decided.

    Reply
  47. Atisha Sood

    I just had to drop you a line to let you know that John and I think that the website is BRILLIANT……………………… Well done.

    Reply
  48. Shailesh Patil

    The site looks absolutely fantastic. Well done to all involved. Very professional & the navigation is great too. Cheers.

    Reply
  49. BV Sriraman

    Hello, its my first time to commenting any post. But I could not stop myself from commenting on reading through such a sensible piece of writing.

    Reply
  50. Ashwin paul

    I read this article completely about the comparison of most up-to-date and preceding technologies, it is remarkable article.

    Reply
  51. Prashanth M

    You seem to be blessed with a perfect blend of good vocabulary and good writing. Thoroughly admired your work.

    Reply
  52. ms jalodiya jageer bhartiya

    You ought to take part in a contest for one of the most useful blogs online. I am going to highly recommend this blog.

    Reply
  53. Medford stanley

    After looking into a handful of the blog articles on your website, I seriously like your technique of writing a blog. I added it to my bookmark site list and will be checking back in the near future.

    Reply
  54. Mihir Deshpande

    You are to be commended for your excellent writing skills.Hope to see more of your flawless skills soon.

    Reply
  55. Ravi Sharma

    What I have seen so far is brilliant and everyone involved should be congratulated. I can see me spending the rest of the evening perusing the site. Just when I thought I would like an early night.

    Reply
  56. Bruno mendes

    Thanks for the marvelous posting. I genuinely enjoyed reading it, you are a great author. I will always bookmark your blog and will come back very soon. I want to encourage that you continue your great work,have a nice day.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *