PNB scam: more than a few rogues in Modi-Choksi affair

The way the Punjab National Bank fraud exploded on the national scene brings back memories of the cascading collapses that sent shockwaves across global financial institutions during 2007-2008. Punjab National Bank has not collapsed and the government will not let it, but the story of this spectacular fraud of over a billion dollars neither begins nor ends in one set of transactions at one branch.

What stands out as the biggest banking fraud in India inevitably links to a daisy chain of toxic follow-through deals that will shake the banking sector to its foundations. It erodes public faith in the very idea of a bank, raises the spectre of a banana republic that doles out people's money to the high and mighty, and makes a mockery of a nation that claims to be a powerhouse of technology offering Fintech (financial technology) solutions to the world.

The question that must be asked now is this: is our money safe in our banks? Why should Indians believe in anything that is reported by the bank managements, their supervisory boards, regulators and auditors if big bombs like this can be concealed and go unnoticed, ticking away quietly in the vaults?

Particular mention needs to be made of the current PNB management and its CEO and Managing Director for claiming that the bank will come out of this one because it has faced many challenges in the past and emerged with flying colours. This is sullying the 123-year-old legacy of the bank by  invoking the rich history of a remarkable start-up that was nationalistic in its aims, cosmopolitan in its make-up and people-oriented in its mission right from day one, with Lala Lajpat Rai, the Lion of Punjab, as the first account holder to answer questions on a shameful fraud.

Seen in this light, the fraud centred on the "mama-bhanjha" duo of Mehul Choksi and Nirav Modi, with PNB acting as the blind king, marks the complete reversal of all that India and the Indian banking system were meant to stand for.

There should be particular consternation at suggestions that this was the doing of a few low-level employees of PNB. The explanations put forward by PNB so far are already unravelling as more suspensions, including that of a General Manager, have been announced. What is remarkable is not that more action is being announced but that the bank and the authorities even thought that their ridiculous attempts at localising a larger fraud could pass muster.

There is little doubt that this is failure at the higher levels in the bank, and questions must be directed at the top management. For example, there is an uncanny connection with Allahabad Bank, where the current PNB CEO & MD has served earlier and where an independent director raised and recorded objections to a management push for loans to be given to Choksi's Gitanjali Gems almost five years ago. Equally interestingly, the former CMD of PNB, who served a five-year term from 2009-2014, was formerly the CMD of Allahabad Bank. While it is true that the current leadership has blown the cover of the fraud and announced it, the period of the fraud calls into question activities that would span the time of some former CMDs as well. This takes the investigation to the office of the CMD.

Already, some stories put forward by the bank are showing up as contradictory. The latest among them is that the bank reportedly met the representatives of Modi and Choksi and asked to be paid back and all documents to be filed. This appears to have been a last-ditch attempt at regularising the fraud. It beats the official position that the fraud was discovered when more LOUs were asked for and the bank demanded a cash margin, only to be told that this is not how the account was treated earlier.

So, any attempt to claim that Letters of Undertaking, or LoUs (which are, in effect, a surrogate for cash and which the Modi-Choksi duo used to pull cash from various banks), are the handiwork of a few rogues down the line will not sell. Here is a gallery of rogues going way up the hierarchy and probably even beyond the immediate bank; they must all be uncovered and brought to justice. Even more interesting is the simple nugget that the banks did not know the doom that awaited them, when the trade knew about Modi all along. There are enough stories about the business models of Modi and Choksi that should have sent some alarm bells.

Regulatory failure

At the level of the government, the finance ministry and the RBI, there is an urgent need to relook at the health of the regulatory environment. The RBI has reportedly said this was due to lack of internal controls at the bank. The question is, what is the RBI for if not to check, order, discipline and correct waywardness, and to hound out criminal activity. What the regulatory set-up has failed to do is to protect people's money. In the end, the loss is being borne by the ordinary citizens of India, multiplied manifold, as we look to people's funds being invested into stocks of these rogue companies via public institutions like the LIC, etc.

Yet, the remedy lies not in throwing the baby out with the bathwater. Quick fix conclusions like privatisation as the answer to all our ills will raise new questions on the motives of those floating these arguments in these times. It is not that the private sector banks have fared very well. The answer to rampant loot and dacoity is not to talk of who controls the keys to the house but that everyone, inside and outside, who plays with these keys be taken to task and awarded exemplary punishment.

We must not forget that the banking industry thrives on depositors' money. That is why the sector is controlled and regulated. Banking works on trust and credibility. When that is gone, not much will remain of the banks, the financial sector and our economy.

(Rattanani is a journalist and Pattnaik, a former Central banker. Both are faculty members at SPJIMR)

(The Billion Press)