These are the big lessons from Nirav Modi PNB scam

Published: February 21, 2018 4:39:17 AM

Unless employees assume the role of conscious keepers, it will not be possible to thwart such fraudulent attempts in future

Nirav Modi PNB scam,. pnb fraud case, RBI data, banking loan frauds, latest news on nirav modi, RBI audit , SWIFT messages Following the news of PNB fraud, glaring headlines and incisive editorials have succinctly flagged the concern about the vulnerability of public sector banks. (Facebook/Reuters)

K Srinivasa Rao

Added to the recent detection of the mammoth fraud at Punjab National Bank (PNB), the RBI data on banking loan frauds totalling Rs 61,260 crore can trigger seismic activities in the industry. Following the news of PNB fraud, glaring headlines and incisive editorials have succinctly flagged the concern about the vulnerability of public sector banks. More than the large amount involved, it impinges upon the reputation of the banking industry, at a time when global attention is drawn towards stabilising bank reforms and greater efficiency of the financial sector. The modus operandi of the fraud so far is unable to convince that, for seven long years, the Letters of Undertakings (LOUs)/comfort letters are rotated and reissued to facilitate short-term buyer’s credit at overseas centres without any underlying line of credit/collaterals. All prudential standards have been allowed to be compromised by a few fraudsters. Perpetrators of fraud of such magnitude cannot continue the chain of transactions in a business-as-usual mode. A strong nexus between the fraudsters and a larger connect with in-house staff in PNB may unfold in a greater measure.

In ordinary course of business, the ripples of such persistent irregularities cannot escape the attention of staff working in the branch for such a long duration. The mysterious staff can always stay away due to sickness, personal work or for attending social engagements when such episodes can get exposed. But it did not happen. Ensuring presence of perpetrators of fraud all the time in the branch is difficult for such a long duration to maintain chain of frauds.

Controls such as internal inspections, reporting systems to higher authorities on state of credit exposure, concurrent audit, statutory audit, RBI audit and many more sporadic management audits will be in place. But beyond these, there are undefined controls in branches. Even visit of celebrity entrepreneurs itself draws the curious attention of the staff.

The behaviour and conduct of staff involved in the fraud, their telephonic discussions, repeat visits of fraudsters to the branch to seek fresh LOUs to replace old ones, informal interactions with colleagues in the department, cross-selling efforts and visits and interactions of a bank’s higher authorities are some unwritten systemic controls that cannot escape unusual happenings from the attention of staff. When seen in the context of absorption of losses on account of fraud, PNB will have to foot the bill unless LOUs are proven as forged. But they are said to be duly authenticated SWIFT messages that cannot be intercepted in ordinary course.

Taking cue from PNB fraud, banks should be apprehensive in dealing with sensitive products. Buyers’ credit is a simple and easy-to-operate facility provided the basic tenets of lending are followed. Such non-fund based facilities are more risky than funded loans. Hence more rigour is applied in granting such facilities. Many times, 100% cash margin is insisted. But it often attracts less attention of compliance wings in banks because they are self-liquidating products and supported by better standards of collaterals.

In addition to the conduct of those handling sensitive and risky portfolio, the vigilance of the staff around is important. Besides institutionalising whistle-blower policy, the staff should be able to sense anything going wrong and provide clue to management. It is necessary to realise that keeping the workspace safe and secured is the collective responsibility of all staff even if they are not in the loop.

Management of operational risk is more about watching behavioural aspects of workforce because their intentional or unintentional failure to enforce systemic controls will devolve as loss to the bank. That, precisely, is the reason staff accounts are under greater scrutiny and even the lifestyle and social connect of employees are kept under watch.

Unless over a million employees of the banking system assume the role of conscious keepers and become sleuths, it is not possible to thwart such fraudulent attempts in the future. Else, the operational risk can potentially damage the reputation and mar the confidence of millions of bank users with new types of frauds hitting the banks. The right learning and way forward for bank employees is to create an ecosystem to protect or perish.

Author is Director, National Institute of Banking Studies and Corporate Management, Noida. Views are personal

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