Bad banking has now become major concern of the body democratic. The Rs11,300 crore fraud at Punjab National Bank (PNB) proved a saga of utter disregard to responsible banking. Ethics took hard beating and governance in utter disarray in the backdrop of unlearnt lessons of the similar past offences both within the bank and outside. It takes years to build reputation but only a few minutes to destroy.
When liberalisation era was set in, it was a green field for all the black money holders to turn it into white. After digitalisation, 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 the Bank by the Reserve Bank of India (RBI) approved Chartered Accountant (CA) firm. The PNB fraudsters successfully hoodwinked all of them. No wonder this gave lever to the FM for finding a scapegoat. Public concerns on recapitalisation of banks recently done by the Finance Ministry proved right.
To top it all, the claims on PNB from other banks surfaced after the fraud came into open. It is yet to be known whether these are pent-up claims or claims of the latest letter of undertakings (LOUs)? The size of claim gives a clear indication that banks chose to wait till the bomb exploded on their face. All these banks got the same reply that they were wont to write to their aggrieved customers – ‘once the investigation is complete, we will look into addressing the claims.’ The reply hides many more questions in our minds.
Transaction wise, LOU is part of unfunded limit under Letter of Credit (LC). In the normal course, banks issue LC against either 100-150 percent value of collateral security or with full cover of term deposit. Buyer’s credit even if backed by LOU requires specific sanction of the designated authority. Since the disbursement will be in foreign currency, it gets through the NOSTRO account of the LOU-issuing Bank only after the sanction of limit is established. At the request of the importer the funds covered by the LOU will be transferred to the account of the exporter. SWIFT 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 are bypassed at will. In the instant case the LOUs seem cyclical in nature, settling every buyer’s credit with a new LOU. This short article does not intend to repeat what is already in the media and press regarding the nature and quantum of fraud in the Bank.
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 key boards, post computerization. Work culture is sans 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. 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 to strong economy. There is imminent need for restoring confidence among the staff and customers. A few measures mentioned below 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 Mangers 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 in depth for the fraud. RBI should immediately form a Directors’ group (no more than 3 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 for 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 smile on their faces 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. ‘A stitch in time saves nine.’
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 fervour.
To borrow from Oliver Goldsmith:
“Let not thy winged days be spent in vain,
Where gone, no gold can try them back again.”
(Dr B Yerram Raju is an economist and risk management specialist. The views are personal.)