Bad banking has become a major concern. The around Rs 11,300-crore fraud at Punjab National Bank proved a saga of utter disregard for responsible banking. Ethics took a hard beating and governance went into disarray against the backdrop of unlearnt lessons from similar past offences, both within and outside the bank. It takes years to build a reputation but only a few minutes to destroy it.
During the liberalisation era, it was a green field for black money holders to convert it into white. After digitisation, year after year, volumes involved in frauds have only increased, notwithstanding the existence of internal Chief Vigilance Officer, external Vigilance Commission, system audit, risk audit, stock audit, concurrent audit, and annual internal inspections by the banks’ own audit team, external statutory audit, forensic audit and the annual audit of bank by an RBI-approved chartered accountant firm.
The PNB fraudsters successfully hoodwinked all of them. No wonder this provided a lever to the Finance Minister for finding a scapegoat. Recent public concerns on recapitalisation of banks by the Finance Ministry proved right.
To top it all, the claims on PNB from other banks surfaced after the fraud came into the open. It is yet to be known whether these are pent-up claims or claims on the latest letters of undertaking (LOUs). The size of claim gives a clear indication that banks chose to wait until the bomb exploded on their face.
All these banks got the same reply – ‘once the investigation is complete, we will look into addressing the claims.’ The reply hides many more questions in our minds.
Transaction-wise, an LoU is part of unfunded limit under Letter of Credit (LC). In the normal course, banks issue LC against either 100-150% value of collateral security or with full cover of term deposit. Buyer’s credit even if backed by an LoU requires specific sanction of the designated authority. Since the disbursement will be in foreign currency, it gets through the nostro account (an account that a bank holds in a foreign currency in another bank) of the LoU-issuing bank only after the sanction of limit is established. At the request of the importer, the fund covered by the LoU is transferred to the account of the exporter.
Consigned to Keyboards
The SWIFT (Society for Worldwide Interbank Financial Telecommunications) message has in-built authentication and, therefore, the receiving bank does not seek confirmation from the issuing bank for allowing the transaction. In the case of PNB fraud, all the processes herein were bypassed at will. In the instant case, the LoUs seem cyclical in nature, settling every buyer’s credit with a new LoU.
Banks that used to have book of instructions as sacrosanct to follow by all the employees and officers in all hierarchies have consigned them to the keyboards, post computerisation. Work culture is now without business ethics governed by greed at the top and middle order. This two-decade-old trend cannot be remedied through compromised regulation and lax delayed punishments.
The government’s basic responsibility in the current environment is rebuilding trust in the banking system lest the gradually built strong macroeconomic fundamentals would collapse sooner than later. Strong banking is a prerequisite for a strong economy. There is an imminent need for restoring confidence among the staff and customers. The following measures may be the beginning:
1. A few suspensions are not enough. Let the purging start from the top. Stop all pensions for the successive retired Managing Directors and General Managers of international banking of PNB from 2006, the year from when the fraud had set in, till they are absolved of involvement
2. Continuance of the present Managing Director is fraught with risk of impartial inquiry but his continuation would be necessary to go into depth of the fraud. The RBI should immediately form a Directors’ group (no more than three members) to run the bank
3. All the discretionary powers of the top management should be immediately reviewed to ensure that the normal credit and investment operations are not hampered
4. Personnel policies relating to transfers, training and placements should be overhauled and those personnel managers/related officials who helped a few officials and employees stay put beyond three years in a number of departments/branches and branches after 2009 should also be warned severely as such retentions could have complicity of the top management
5. Restore customer confidence with aggressive drive in all branches by ensuring that no customer’s genuine requirement is put on hold
6. Stop sale of all non-banking products like PNB Mutual Funds and PNB Life Insurance by the bank staff of all cadres. All the cadres of staff should be ordered to do banking only
7. Boost the morale of the staff at all levels through onsite short duration training programmes by peripatetic trainers so that delivery of all customer services would take place with a smile and without the need for having to explain for the frauds of others to over-the-counter customers
8. Balancing of all books and audit of all branches without interfering with the regular operations of the bank should be done to ensure that different types of frauds are not hiding.
9. Replace the existing board forthwith with persons of proven integrity and character
10. Give the board a clear time and framework to correct the malaise with accountability and transparency. Let this new board function without fear or favour
To borrow from Oliver Goldsmith:
“Let not thy winged days be spent in vain,
Where gone, no gold can try them back again.”
(The author is an economist and risk management specialist)