Lessons from Nirav Modi Scam
Nirav Modi has been given too much credit (pun intended)! Both in terms of bank loans and for his ability to game the system.
US Bankruptcy examiner John J Carney and his team have unraveled Nirav Modi’s modus operandi consisting of shell companies, round tripping of transactions, and funds diversion. This has been achieved in a few months thereby raising an important question.
If a foreign investigator could pierce through the scam in a few months, why couldn’t the Indian bankers? After all, bankers’ association with Nirav Modi and others of his tribe generally dates back a few decades. 
At the heart of the scam, lies an age old trick. Round tripping of sales and purchases through a maze of related parties and shell companies. The bloated turnover is used to obtain higher limits or loans from the banks, which are then diverted for personal use. The scam is exposed only when a link in the chain breaks.
Such frauds cannot happen without the connivance of bankers. Bankers have access to what can be called the “economic horoscope” of the borrowers. This includes cash flow statements and audited accounts. 
Basic analysis of the same, along with use of technology such as data analytics, can make interesting revelations about transactions with key parties, both in number and value. 
Intelligent questioning can help to detect other key patterns in the functioning of the borrower. Scams can be nipped in the bud but only if the will exists.
Sadly, some bankers do not realise that their job does not end but only starts after sanctioning of the credit limits or loans. 
Regular monitoring is a must but is hardly done, often intentionally. 
Many bankers often neglect to even exercise their lawful rights against the erring borrower and/or guarantors.
In a recent landmark judgement, the Supreme Court has ruled that bankers are within their rights to encash personal guarantees of the guarantors even though proceedings under the Insolvency and Bankruptcy code (IBC) may be going on against the borrowers. 
Banks normally take personal guarantees from the promoters but rarely, if at all, encash it even in cases of willful default. IBC is of recent vintage. 
The moot point is why did banks not invoke personal guarantees till now while otherwise making a hue and cry of burgeoning bad loans.  Is any more proof required of the complicity of the bankers? 
The Reserve Bank of India (RBI) must immediately publish a white paper disclosing amongst others: 
(1) what percentage of loans, both in number and value, have been backed with guarantees, 
(2) average cover provided by guarantees with respect to the loan advanced (will help to gauge the adequacy of the value of the guarantees), and
(3) number of cases in which the guarantees were invoked and (4) number of cases in which action has been taken against the bankers for not invoking the guarantees even when called for. 
Besides other benefits, the above analysis will help to fix accountability and reduce further loss to the public exchequer. 
Additionally, the threat of work paralysis, which raises its ugly head every time any action is taken or threatened against a banker, will dissipate automatically. 
Nirav Modi alone cannot be credited with round tripping to dress up the books. Thousand others must be doing the same. Banks must immediately analyse all loan accounts to lock the stable before the horse bolts. 
Neither should banks allow themselves to be deceived by those accounts where loan and interest payments are on schedule. 
Many unscrupulous borrowers keep the bankers happy by resorting to these tactics while defaulting on income tax payments, provident fund (PF) dues, and large dues to suppliers. 
These are early warning signals of impending disaster which can be averted with basic diligence.
There is no one panacea for all bank frauds. But most can be avoided if only bankers learn to treat public funds with the same care as they use with their own personal money. 
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.)


Liju Oommen
6 years ago
All checks n balances are fine. But will they work when the party in question is best buddies with the PM of the country?
Free Helpline
Legal Credit