We never seem to learn from hard experience. The banking system, creaking with non-performing assets (NPAs) of over Rs 8 lakh crore, and with quite a few frauds to contend with, is again in the dock. Besides Nirav Modi cleaning out the Punjab National Bank (PNB), another 17 banks have now woken up to an exposure of Rs 3,000 crore to the diamantaire. No one knows where the mayhem will end.
There are three obvious failures staring the establishment in the face. Bank frauds have taught us that without the collusion of key officials, siphoning off money is not possible. There have been many such instances in the past. Keeping tabs on high value advances through an empowered committee is one easy way to stem this rot.
Second, despite umpteen cases, banks have not put systems in place that make such frauds difficult to execute. The modus operandi in earlier frauds was the same as Nirav Modi’s—taking Letters of Undertaking (LoUs) from Indian banks, guaranteeing payment, and encashing them abroad. The payment does not come and the banks then have to shell out the guaranteed amount. In this case, the LoUs, usually given for three months, were repeatedly rolled over. When one LoU became due for payment, PNB would issue a fresh LoU and the loan kept getting stretched. This is an unauthorised practice, which PNB’s internal system should have detected.
Finally frauds of this magnitude have early telltale signs. It is not difficult for surveillance teams of agencies such as the Enforcement Directorate (ED) to detect the blinking red lights. A whistle-blower had reportedly alerted the highest authorities as early as mid-2016 of the goings on in Gitanjali Diamonds, promoted by Mehul Choksi, an uncle and business partner of Nirav Modi. Instead of it being referenced to the enforcement agencies, the complaint landed up with the Registrar of Companies (RoC). Is it just inefficiency that aborts early detection? Or, is it a larger conspiracy? We hope the Nirav Modi case will throw up some pointers.