The Rs11,400 crore swindle at PNB’s Brady House branch

Details of the PNB scam are only still unveiling—and more worryingly, there is a strong buzz that this is just the tip of the iceberg. Photo: Pradeep Gaur/Mint

Last week, there was fresh cause for national moral outrage: the discovery of a Rs11,400 crore fraud allegedly perpetrated by some employees of the Brady House branch of Punjab National Bank (PNB) in connivance with high-profile jeweller Nirav Modi.

Details of the scam are only still unveiling—and more worryingly, there is a strong buzz that this is just the tip of the iceberg and that similar scams involving other high net worth individuals (HNIs) are likely to be uncovered in the near future. Regardless, some clear takeaways have emerged.

First, is the feeling of deja vu. Those of us who lived through the 1992 securities scam perpetrated by the now late Harshad Mehta, the storyline is all too familiar. Once again, the public sector banks are at the centre of the scam playbook and it has been enabled by monetizing information arbitrage—right under the nose of those supposed to be guarding public money. Both the scandals are replete with both errors of omission and commission. Ironic that the PNB scam should surface just months after the country recorded the 25th anniversary of this dubious piece of economic history.

Second, the modus operandi too is ominously very similar to the one employed in the securities scam. In the latest instance, employees of PNB allegedly issued so-called letters of undertaking (LoUs), guarantees enabling Modi’s companies to raise credit from other banks. In 1992, it was the bankers’ receipts (BRs)—essentially an IoU to pay for securities borrowed from another bank for a 15-day period. Like in the case of LoUs, the BRs too were fake.

Third, like in the securities scam, the PNB scandal shows the regulator, the Reserve Bank of India (RBI), in poor light. If indeed the scandal at the Brady House branch of PNB has been operational since 2011, then this error of omission is unforgivable.

It is symptomatic of a systemic failure and shows up the weak edifice of the financial system of a country aspiring to be in the big league. It is a classic outcome of failing to adhere to a rules-based regime and something that is bound to spook foreign investors—and of course honest domestic business.

Surely, RBI has a brief beyond handing out (admirable) moral science lectures on the fiscal misdeeds of the Union government. It is time for the central bank to provide a credible explanation on how a scam of this magnitude could play out for seven years and no red flag was raised either by RBI, the auditors and PNB’s own internal monitoring mechanism. Maybe it is time to examine the role of RBI in a modern economy, especially whether it needs some reordering and evolve in the context of an environment where the financial system’s vulnerabilities to such white collar scams will only worsen.

Finally, the moral outraging has led to the predictable blame game among the country’s two leading political parties—the incumbent Bharatiya Janata Party (BJP) and the Congress. The political noise together with the glamour quotient associated with the alleged HNIs involved in the scandal can crowd out meaningful debate.

The Congress is right in holding the Union government to task. But it can’t just be about apportioning blame; because if the scam has indeed been playing out since 2011 then it is equally morally culpable. This is exactly the distraction that criminals use to escape indictment. And the laborious legal process—one of the indictments in the Mehta episode was handed out in 2016, 24 years later—only worsens the odds of quick justice.

Both sides of the political aisle have to understand that fixing the blame and ensuring quick justice is only part of the solution. What the swindle at PNB’s Brady House branch has revealed is that there is a systemic crisis in the financial system. This needs to be fixed like as of yesterday; for which tough questions needs to be asked of everyone, including RBI. Failure to do so would mean just kicking the can down the road and waiting for the next news cycle of bloodletting and moral outrage.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus.Respond to this column at anil.p@livemint.com.