The big news is that despite the Reserve Bank of India’s (RBI’s) trust in public sector banks (PSBs) post the infamous Vijay Mallya fiasco, jeweller Nirav Modi was able to dupe the authorities by stealing somewhere close to ₹11,500 crores in driblets of foreign currency. What comes as an even bigger surprise is the fact that neither the internal auditors nor the people in power were able to unearth the fraud when it was being committed.
Reports suggest that Nirav Modi had obtained short-term loans from the Punjab National Bank (PNB) through an instrument called the Letter of Undertaking (LoU). It is an instrument that let him avail loans in foreign currency without any cash margins or collateral security. Allegedly, Modi, along with a couple of his associates, put the LoUs on the Society for Worldwide Interbank Financial Telecommunication System (SWIFT) without getting the same recorded in the bank’s core system. The SWIFT system is used for transferring funds across geographical boundaries.
What is even more shocking to know is that not even a basic restoration of the PNB’s Nostro account (an account owned by the bank in a foreign bank or branch – this account generally has foreign currency) was carried out by the auditors. In normal cases, banks and its branches are required to conduct three major types of audit – the statutory audit, the concurrent audit and the regular internal audit. The question that requires an immediate answer is: how on earth did this irregularity go undetected for so long?
Meanwhile, the Congress has asked why Nirav Modi and Mehul Choksi were allowed to leave the country. Senior Congress leader Kapil Sibal also questioned Prime Minister Narendra Modi’s silence on the issue. According to a theory proposed by Kapil Sibal, the Narendra Modi, along with the finance minister Arun Jaitley, knew that the country was being looted.
Going on a reckless arresting spree won’t do much good as the scam is deep-rooted. What will be interesting to see is the approach PSBs take in order to avoid such scams in the future. There’s another question that’s equally interesting. Could such a major scam have gone unheeded in a private bank – as private banks are believed to be governed by a considerably superior set of norms and protocols than PSBs?
Thus far, it’s not clear whether Nirav Modi’s proximity to those in power helped him to bypass the existing set of security protocols. But, in my opinion, problems such as these continue to ail all PSBs and not just PNB alone.
The state-led financial sector is rotting away. It is a situation that goes beyond one lender or company. Looking at the sorry plight of PSBs, the industry chamber ASSOCHAM has called for privatising PSBs as public sector banks are simply slipping from one crisis to the other. It is high time that the Central government brings in reforms in the functioning of PSBs, without any delay.