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.)
 
 
 
 
  
 
 
 
 
 
 

 

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COMMENTS

Liju Oommen

2 months 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?

Separate Ombudsman for Digital Banking Trades, says RBI
India’s banking system requires a separate banking ombudsman (BO) to deal with the growing number of transactions through the digital channel, the Reserve Bank of India said. 
 
The number of complaints related to digital transactions, and deficiencies in mobile banking, rose to as high as 28 percent as of June 2018 of the total number of grievances with the RBI. Complaints relating to the digital mode of financial transactions accounted for just about 19 percent during the financial year ended March 2017, according to the central bank. 
 
``The growing trend and increasing complexity of such complaints along with the emergence of non-bank service providers in the digital payment space underlines the need for designing a dedicated ombudsman scheme for redressal of such grievances,’’ the RBI said in its annual report. 
 
India will be one of the few countries to have separate ombudsmen for digital transactions and use of prepaid payment instruments (PPI) issued by banks and non-banking finance companies. 
 
The RBI said it will formulate an ombudsman scheme for digital transactions and will set up offices of ombudsman for digital transactions at select centres. It will also review the ombudsman scheme for NBFCs for enhancing its coverage to other eligible NBFCs during the year.
 
 
 
 
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Bank Lockers: Maharashtra Is Most Loved State by Thieves
Over the past three years, there were 43 cases of theft in lockers of public sector banks (PSBs) and Maharashtra tops the list in terms of number of thefts, reveals a written reply in the Lok Sabha.
 
In the reply, Shiv Pratap Shukla, minister of state for finance, said, "... during the past three financial years and till 31 July 2018 for current year, 43 cases of theft took place in the lockers of PSBs and the amount of loss reportedly suffered by customers was Rs16.8 crore. PSBs have informed that first information report (FIR) were lodged in all the cases, some arrests have been made by the Police and so far valuables worth Rs6.5 core have been recovered."
 
 
The Reserve Bank of India (RBI) had issued instructions to banks about safety of bank lockers and advised banks for exercising due care and necessary precaution for protection of lockers provided to customers, reviewing systems in force for their operation on an ongoing basis and taking necessary steps, having well-documented security procedures, properly training staff concerned in the procedure, and internal auditors ensuring that procedures are strictly adhered to. 
 
Referring to a recent incident of bank burglary in which safe deposit lockers were broken open and jewellery reportedly taken away, a communication from RBI says liability of the bank depends on the facts and circumstances of the incident and despite the conditions of the lease agreement, lessees should insure contents of the lockers. Banks can be held liable if negligence is proved with regard to conditions of the strong room, lockers, and safeguards required in the light of the location, it added.
 
Citing inputs from PSBs, the minister said banks exercise reasonable care and precaution for the protection of the strong room and the lockers provided, and that security measures including security of locker rooms are reviewed periodically. To strengthen security of lockers, banks also monitor access to locker rooms by closed circuit television (CCTV) cameras and install burglar alarms. 
 
Since liability to compensate is governed by provisions of extant applicable laws, such as the Indian Contract Act, no specific legislation in this regard is proposed, the minister added.
 
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