When the $1.77 billion fraud at PNB involving high profile diamond merchant, Nirav Modi, came to light it was already clear that there was a systemic crisis. A fraud of that size would not have been possible without connivance at the highest levels. As more skeletons tumble out of the cupboards, the actual magnitude of the case is manifesting itself. Here are 3 things you need to know…
Loopholes in the system…
The SWIFT system which is a secured system for global banks to exchange funds and confidential documents quite apparently has its own set of loopholes. There is still too much dependence on an individual or a set of individuals and that makes the banking system in India susceptible to frauds of this nature. At the PNB end, it was a classic case of lax controls and poor levels of due diligence. A product like the Letter of Understanding (LOU), which had a maximum tenure of 90 days, was issued for 365 days. How this escaped the eye of all audits and review is something that really beats logic. Secondly, PNB is guilty of willfully breaking its own rules and internal systems pertaining to compulsory transfer of personnel in critical positions. While there may be a strong case against PNB, this is obviously not unique to a single bank alone. One needs to get a bigger systemic picture. Banks who lent against the LOU are equally guilty of laxity!
What about other banks?
A popular debate in the media has been the culpability of PNB for the entire defrauded amount of $1.77 billion. That misses the point. While it is true that other banks gave money against the LOU issued by PNB, it is hard to imagine that there was no due diligence done at their end. Banks have access to SWIFT audit trails and other banks cannot hide behind the fact that they solely relied on the LOU issued by PNB. Obviously, in the enthusiasm to get more business there has been a much larger systemic failure of due diligence by the other banks. Had they undertaken basic levels of checks, audits and transaction trail analysis, it should have been obvious that everything was not above board!
Bigger corporate questions…
There is a very stark coincidence that cannot be missed at this juncture. Exactly a few days before the PNB fraud blew out, large banks like SBI, BOI and IOB had reported a sharp rise in their NPAs. Obviously, there is still a lot of window dressing by banks and that is something that appears to have been pointed out by the RBI. The larger impact could be that if these kinds of frauds are endemic in the banking system, then we could still be far away from a bottoming out of the NPA cycle. PNB is just the tip of the iceberg and indicative of the systemic mess. There is a lot more venom still in the system!
