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  1. Nirav Modi PNB scam: What ails big money? We have to improve processes – Here is why

Nirav Modi PNB scam: What ails big money? We have to improve processes – Here is why

Television and print media have exhaustively covered the imbroglio at the Punjab National Bank. The cause is traceable to a coterie which misused passwords to directly enter and send Letters of Undertakings to other banks through the SWIFT system.

By: | Published: March 9, 2018 2:14 AM
Nirav Modi PNB scam, nirav modi, pbb fraud case, money, gitanjali group Television and print media have exhaustively covered the imbroglio at the Punjab National Bank. The cause is traceable to a coterie which misused passwords to directly enter and send Letters of Undertakings to other banks through the SWIFT system.

Television and print media have exhaustively covered the imbroglio at the Punjab National Bank. The cause is traceable to a coterie which misused passwords to directly enter and send Letters of Undertakings to other banks through the SWIFT system on behalf of the Gitanjali Group and collect the acknowledgements, without registering the transactions in the banking system. Further, the lack of integration between SWIFT and core banking prevented interbank reconciliation. Remedial actions suggested are to overhaul the audit process, have interbank reconciliation and take action against the errant mob. Is that all? Since the deluge of analysis and discussions has missed out what other businesses have done beyond routine voucher audits to prevent such fiascos, I shall focus on that angle. Why do colossal losses afflict predominantly the financial system, IT and pharmaceutical organisations? Harshad Mehta, Ketan Parekh, Tata Finance, Satyam, IndiaWorld, Ranbaxy and Fortis serve as examples of infractions, which are neither fractions nor commissions, but represent erosion of the entire capital. Why has this virus not spread elsewhere? Aside from normal business losses, why don’t traditional businesses stun the country by abruptly declaring that notwithstanding their annual statements, they never ever made, say, refrigerators, their receivables were bogus, or that their entire designs were stolen? (Volkswagen, the Lopez episode at GM and Enron are not Indian).

Since competence of individuals is the same everywhere, there is a different factor at play at other businesses. Being more familiar with the automotive industry, I shall elaborate that case with a hypothesis that intense efforts by the industry in the last two decades to become lean, mean and clean have paid off. Through a plethora of processes such as war on waste, re-engineering, Total Productive Maintenance, Total Quality Management, Lean Management, Six Sigma and IT audits, businesses have insulated themselves reasonably from shocks due to errors, apart from substantially improving performance. The war extended beyond the shop floor to office processes as well. This massive movement has involved not only Indian and international experts who are clued in on the best practices adopted universally in several industries, but also the entire workforce of companies. Workers at grass-roots levels have contributed through thousands of meritorious suggestions, to elevate their organisations to a different level of excellence. Pressures, prods and audits by vehicle manufacturers on component suppliers have also helped. A key aspect of this metamorphosis is innovative techniques to ensure no failure, or at least to get timely warnings of impending failure. Critical processes have redundancies. Machine panels have been made transparent to detect belt or component wear. Equipments trigger SMS messages to warn of upcoming malfunction and strict IT policies restrict despatch of confidential files through mails. Leave alone transaction documents, all of which are numbered and controlled, even products such as pumps or bearings are numbered to have traceability right from its origin at some steel mill to the vehicle where it is assembled. Long back, reconciliations across trade partners were virtually eliminated by having integrated portals to exchange information on a real-time basis. Such a mass movement is not visible in big finance.

While the auto industry was unleashing the power of IT to handle internal processes efficiently, banks seem to have concentrated on the more glamorous front-end sophistication, leaving the back-end to crooks. While crude products such as shafts and bushes are accounted by sophisticated systems, delicate financial systems committing monstrous sums are operated by crude processes. This is not an exception and there are more shortcomings. One example is NEFT funds received by firms which cannot be automatically reconciled between companies since it has only UTR numbers not meaningful to anyone. Incredibly, these can be reconciled only by matching values, a convoluted manual way of performing a critical process. That such abysmal methods can be in practice in an environment bristling with computer systems and where dabbawalas reconcile consignments to Six Sigma levels shows not “systemic failures” but criminal negligence. The mother of all scams was seen decades ago at Wells Fargo, when a computer operator familiar with the system opened numerous accounts and posted fictitious debits and credits, always ensuring that credits went ahead of debits. Before he exited with his loot, a mistimed entry brought down the dominoes. Banks have not leveraged such experiences comprehensively. Instead of waging a war to improve processes, discussions today centre more around exhortations such as “improve governance”, clarify the role of RBI, privatise banks or improve the composition of review boards. Although well-meaning, these cannot substitute an immediate scan at grass-roots levels using financial commando troops. We are two steps before an excavator comes during peak banking hours and scoops out the vault. Discussions at peripheral levels can only be supplements to blitzkrieg action.

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