Columnists
Roots of the PNB scam
Rome was not built in a day. On similar lines, the PNB fraud has its roots in a corrupt banking system that’s unfolding only now
Power corrupts and absolute power corrupts absolutely,” is an old adage that aptly describes the degeneration of the Indian National Congress that misruled India for several decades. From the Jeep scam in 1948; to the Mundhra scam in the 1950s; to the Rajendra Sethia scam in 1985-86; to the Satyam scandal of 2009; to allowing Jatin Mehta of Winsome Diamonds flee the country in 2013 to become a citizen of St Kitts; to the current frauds perpetrated by rogue jewellers like Mehul Choksi and company who was given loans by flouting basic credit appraisal norms under the Congress-led UPA in 2011. A rent seeking, patronage-based economy that thrived on corruption is, unarguably, the worst legacy of the erstwhile Congress Governments.
What an irony that the ‘world's biggest bankrupt’, Rajendra Sethia, the disgraced sugar and jute baron, who defrauded Indian banks of crores of rupees, did so when Manmohan Singh was the Reserve Bank of India (RBI) Governor in 1985 and then became the head of the Planning Commission in 1986. The bigger irony, however, is that Manmohan Singh went on to become India's Prime Minister from 2004-2014 — a period termed by many as India's lost decade.
Coming to the fraud at the Punjab National Bank (PNB). The fact that credit lines were extended via Letter of Undertakings (LoUs) against fake import bills, and that too without collecting requisite margin, is well established. The fact that these LOUs were fraudulently renewed is also well-known. Again, the fact that financing via LOUs, that were primarily given in 2011, turned delinquent in 2012-13, is also well documented. However, these loans were restructured between September 2013 to September 2016, under the then RBI Governor, Raghuram Rajan.
Critics slamming the BJP Government of not detecting the fraud at PNB much earlier have got it all wrong. Restructuring/evergreening of loans is not uncommon. The BJP Government had no reason to believe, Raghuram Rajan was, deliberately or otherwise, presiding over a fraud wherein LoUs were not entered into the books of the banks or the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messages were not being reconciled with the relevant banks’ core banking solution apparatus. Statutory auditors are appointed by banks from a list, duly vetted/approved by the RBI to ensure that internal auditors of the banks do not have a free run. Statutory auditors too never raised an alarm. It is surprising that the auditors never sensed anything amiss in the Bank Reconciliation Statement which should have ideally reconciled the outstanding liabilities with SWIFT messages and also the huge money flows via various nostro accounts.
The RBI is the conscience keeper of the banking system and the custodian of all cross-border transactions. Clearly, Rajan failed in his regulatory role as the buck finally stopped with him. The PNB scam would have taken much longer to come to light had it not been for the two circulars sent by the current RBI Governor, Urjit Patel. One was sent in November 2016, asking the banks to strengthen the SWIFT operating environment. Second was sent on January 24, instructing the banks to report the slightest discrepancy pertaining to accounts that have been repeatedly restructured. Banks were also told that such accounts should henceforth be called Special Mention Accounts. By January 29, the lies of Nirav Modi had been nailed. PNB reported the matter to the Central Bureau of Investigation, which promptly registered an FIR and initiated needful action.
Amidst the sordid PNB saga, the Narendra Modi Government needs to be applauded for putting in place necessary legislative framework so that India can be spared its ‘Nick Leeson’ moment in the near future. Be it the amendments to the Chit Fund Act, operationalising the Benami Transactions (Prohibition) Amendment Act, 2016, that was due for 28 years on the statute books, or the NPA Ordinance that was promulgated in May 2017 to authorise RBI to intervene directly in directing banks to resolve default cases under the Insolvency and Bankruptcy Code (IBC) — the Modi Government has in a short span of less than four years brought sweeping economic reforms to uproot corruption.
For instance, the NPA Ordinance made sweeping amendments to the archaic Banking Regulation Act of 1949. The IBC makes a clean distinction between genuine and wilful defaulters, and has resolved more than 655 chronic default cases via the National Company Law Tribunal. Very few know that IBC subsumes within its fold insolvency laws dating back to 1909 and 1920 and outdated ones like the Indian partnership Act of 1932, Sick Industrial Companies (Special Provisions) Act, 1985, SARFAESI Act of 2002, the Limited Liability Partnership Act of 2008 and many more. Subsuming these laws under a single code was a herculean task. That the BJP Government actually accomplished this in less than four years is nothing short of exemplary. The beauty of IBC is that under liquidation proceedings, outstanding dues of employees will be given preference over that of even secured creditors.
As they say, Rome was not built in a day. That said, the Narendra Modi-led BJP Government's game-changing measures to uproot institutionalised corruption are hugely commendable because each of these measures, demonetisation included, aim at not only overhauling old laws and bringing in new ones, but most importantly, aim at transforming the mindset of the citizenry. After all, corruption starts in the mind before it reaches the corporate boardroom or a bank's vaults.
(The writer is an Economist&Chief Spokesperson for BJP, Mumbai)
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