Punjab National Bank (PNB), owned by the Union government, has admitted that fraud of Rs 114 billion has occurred within a Mumbai branch. False letters of undertaking were used as a basis for branches abroad of other Indian banks to transfer funds in dollars on behalf of PNB. The letters were issued for accounts related to gems and jewellery companies controlled by Nirav Modi and his relatives. It has been revealed that Mr Modi left India in early January, well before the original first information report in this case was filed with the police. Naturally, the real scale of this alleged fraud will only be revealed after a more thorough investigation, and there should be no rush to judgement.
However, it is clear that a major vulnerability in the Indian banking system has again been exposed. Risk management mechanisms in Indian banks, particularly in public-sector banks, or PSBs, are simply not up to scratch. This is not a problem restricted to PNB, although the same bank was also caught up in a similar scandal involving diamond-trading company Winsome in 2013. The diamond business, which involves shifting large amounts of money across international borders to balance the trade of expensive stones, is naturally often the focus of fraud and money laundering investigations; and it is of concern that some banks appear to have been lackadaisical in their approach to this particularly dangerous business. It has been reported, for example, that letters of undertaking of this sort were issued by the overseas branches of PNB’s partner banks for longer periods than the regulator’s recommendation of 90 days from the date of shipment of merchandise. There is also a failure on the part of so many banks that paid out billions of rupees without checking with the PNB that had supposedly issued the guarantees.
The question remains: How can every risk-mitigation tool be bypassed so simply by two employees using the inter-bank SWIFT system and unauthorised letters? How is it that a fraudulent mechanism can last as long as this one is supposed to have done — for over seven years? Any system that is so easy to manipulate or ignore should not have been considered acceptable in the first place. The easy cooperation between banks in this manner also highlights the dangers of a largely nationalised and unreformed banking industry. Whether private or public sector, the loss of depositors’ money should lead to managerial accountability. Those who have signed on to the flawed system have to pay a price.
Private banks have hardly been models of accountability, but public sector banks have consistently been worse — unsurprising, given their stunted governance structure. The PNB saga shows the problems of public sector banking — and failure of systems, oversight, and procedures — have acquired a whole new dimension. The Reserve Bank of India has been cautioning the banking system for long highlighting high-value fraudulent transactions as a matter of serious concern. The regulator has been tightening rules on complex financial transactions through closer monitoring and has been sensitising bank boards about such threats to the system periodically. Until accountability is imposed by their chief shareholder, the government, such scandals will continue to break with distressing regularity.