The fraud at Punjab National Bank (PNB) is not the first in a state-run bank and may not pose a systemic risk even though the amount involved is close to $2 billion. But it is a wake-up call for everyone—bankers and regulators—revealing how vulnerable the country’s banks are to swindling. At the core of the cheating by the Nirav Modi group is collusion and corruption of employees who issued unauthorised of letters of undertaking which were then used by the group to avail of buyers’ credit from foreign branches of other Indian banks. However, it is not clear whether any external authority was involved and to what extent the top management was in the know. What is really worrying is that PNB’s SWIFT network was not integrated with its Core Banking System (CBS), something that seems to have escaped the Reserve Bank of India (RBI) inspectors all these years. In fact, RBI deputy governor SS Mundra had highlighted possible misuse of SWIFT in 2016 but the inspectors appear to have ignored the warning altogether. Equally worrying is the fact that the bank’s auditors did not red-flag any discrepancies in the account.
The government has been quick to demand an explanation from the RBI for the lapse. It is well within its rights to do so because RBI is the supervisor for banks and has slipped up badly. But as the majority owner, the government cannot shrug off its responsibilities; it must accept that corporate governance at the bank was very poor. Instead of trying to distance itself from the crime and pass on the blame, the government should work with the central bank to assess risk control mechanisms and review of audit processes at the banks. At the same time, it must completely overhaul the supervisory system and build in several layers of checks and balances. The RBI has been asking, for several years now, to be relieved of its responsibilities as the supervisor for banks and has also wanted to step down from their boards. However, not only has the government not agreed to this request, it has left the post of deputy governor in charge of supervision vacant for about seven months now.
The government feels it is entitled to privileges as owner of the banks but it doesn’t feel any obligation to shoulder the burden of supervising and monitoring them. It wants to appoint all top executives but is unwilling to be responsible for their actions. It uses the state-owned banks to further its financial inclusion programme, mandating banks lend to agriculture and to open millions of no-frill accounts. But when it comes to supervision, it passes the buck. Again, while much of the non-performing assets with PSU banks are the result of poor credit appraisals and also favours shown by bank officials to borrowers, there has also been a lot of political interference in the running of banks. In all these years, no government asked the banks to clean up their balance sheets—it was the RBI, under Raghuram Rajan, that initiated the asset quality review (AQR). As long as it is the owner, the onus is on the government to ensure good corporate governance at the banks. It cannot simply wash its hands off the unpleasant business.