The great bank heist

Shorn of the political din and dust over the shenanigans of jeweller Nirav Modi and Meher Choksi, the stark fact is this: that they have decamped from India with some ₹11,500 crore from a Mumbai branch of the Punjab National Bank (PNB) – cleaned out over seven years in driblets of foreign currency – without the internal auditors and even the Reserve Bank’s inspection team coming to know. This makes a mockery of recent and repeated assurances from the RBI and the Centre that post-Vijay Mallya, public sector banks are better placed to deal with fraud. The precise details are still murky but what the duo seem to have done is to use an instrument called a ‘letter of undertaking’ (LOU) to obtain short-term credit in foreign currency from overseas banks. PNB’s Mumbai branch issued LOUs in favour of Nirav Modi without either cash margins or collaterals and the two employees who have now been suspended fraudulently put out the LOUs on the SWIFT system (Society for Worldwide Interbank Financial Telecommunication) without recording the same in the bank’s core banking system. The SWIFT is used for transferring funds across borders. In what appears to be a deliberate act, the Mumbai branch did not seek transaction details from overseas banks. It’s shocking that even a basic reconciliation of PNB’s nostro account (an account held by a bank in another in foreign currency) was not carried out by the bank or the auditors. In normal course of business, a bank and it’s branches are subject to internal audit, concurrent audit and statutory audit apart from the regular inspection by the regulator, RBI. The question that rises is: how did the irregularity escape notice?

While nailing the scamsters, what also needs to be fixed are management systems at PSBs. The moot question is whether such a scam could have gone undetected for so long in private banks, which have somewhat superior protocols. It is remarkable that in this case, loan authorisations were disbursed at junior levels despite the sums involved, in violation of basic norms. It is not clear whether the celebrity status of Nirav Modi, and his perceived proximity to those in power, played a part in the ease with which even existing safeguards were bypassed. Clearly, this is a problem which continues to dog PSBs, not PNB alone.

The flurry of arrests at PNB is not enough. The conspiracy runs deep. The system of credit appraisal in the system as a whole, and in PSBs in particular, is clearly broken, going by the jump in NPAs and frauds. The Centre cannot afford to delay governance reforms in PSBs any longer.

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