Nirav Modi, the high flying diamantaire, who fled abroad after defrauding Punjab National Bank (PNB) of Rs11,400 crore, sent a carefully crafted letter to PNB on 20th February making a slew of allegations that was leaked to the media through a national news agency. He accused the Bank of acting with unwarranted haste, exaggerating the fraud, destroying his business, needlessly involving his wife and brother and closing the possibility of repayment and resolution. It was a veiled threat to tie up the Bank in litigation abroad, to counter extradition attempts, while also hinting at the possibility of a negotiation, probably to ring-fence his family from the consequences of the fraud.
The sheer audacity of Mr Modi’s letter was only matched by the Reserve Bank of India’s (RBI’s) claim of having ‘confidentially’ warned banks about possible fraud in the SWIFT system on three occasions since 2016. This, when the twin scams at PNB and Bank of Baroda (BoB) add up to over Rs20,000 crore. The fraudster and the regulator, both, make the Narendra Modi sarkar, which came to power on the promise of a corruption-free government, appear weak and easy to manipulate. With the general elections round the corner, the government will need to show results if it wants to maintain any credibility with the people. So let’s look at a few issues that will make a difference.
Nirav Modi’s gambit has a precedent of sorts. Remember, how S Ramalinga Raju, chairman of Satyam Computers, chose to fall on the sword with his dramatic confession on 7 January 2009 that he had been cooking the books and covering losses for a long time? That scam was quickly wrapped up with the sale of Satyam; he did a small stint in jail but managed to ring-fence his entire family from the consequences of fraud. Nirav Modi probably hopes to engineer a similar outcome with his highly publicised letter.
But the situation is different this time. For one, India is heading into the general elections and the government, which has already provided Rs2 lakh crore for bank re-capitalisation, cannot go soft on fraudsters. Thirdly, the exposure of another massive fraud of Rs3,695 crore by Vikram Kothari of Rotomac ball pens, originating at BoB may have queered the pitch for any compromise without political consequences. In fact, an odd report by India’s leading news agency suggesting that the highly influential Vikram Kothari may also have fled India, probably, led to his immediate arrest at Kanpur. This will make it harder for Nirav Modi to remain a fugitive abroad.
So far, the government’s only public reaction has been to try and pin the blame on the Congress. While it is true that bad loans ballooned substantially under the United Progressive Alliance (UPA) government’s second term, the bulk of the swindle by Nirav Modi’s companies happened in the past year; so trying to shift blame only weakens the government’s position. Banging on about promulgating the Prevention of Money Laundering Act (PMLA) or the bankruptcy law is equally counterproductive. The first reminds people about how claims of unearthing black money through demonetisation, and striking off over 200,000 shell companies from the registrar of companies, have failed. The latter only underlines the fact that the public is, ultimately, paying for the loot of banks by super-rich industrialists.
The recent bids for big bank defaulters, such as Bhushan Steel, Electrosteel Steels, Monnet Ispat and Essar Steel, would have been a moment of triumph for the Modi sarkar but for the two banking scandals exposing the ridiculous ease with which high-profile businessmen could loot thousands of crores. With just a year to win back peoples’ trust, the government needs to move fast and handle things differently. Here are a few thoughts on what may work and what won’t.
1. Nirav Modi has to be brought to India quickly to restore the government’s credibility. Until then, its failure to ensure extradition of Lalit Modi and Vijay Mallya and the absence of any move to extradite Jatin Mehta of Winsome Diamonds (who vanished to St Kitts after duping banks of Rs6,800 crore) will give the Opposition a good handle to target the government.
2. If Nirav Modi’s letter appears to offer a deal, the government has done well to signal that it won’t play ball. My sources say that Vipul Ambani’s arrest (he was chief financial officer at one of Nirav Modi’s companies and first cousin of Mukesh Ambani) is a warning to powerful corporate families to bring Nirav Modi back or stricter action would follow. If true, this is a step in the right direction.
3. The draconian provisions of the PMLA and the Companies Act of 2013 have seen many business families acquire foreign citizenship as a sort of get-away plan. Nirav Modi himself has allegedly acquired Belgian citizenship while continuing to hold an Indian passport. Foreign citizenship or non-resident status is a clear red flag; but bankers haven’t bothered to factor it in as a risk while extending massive loans to their companies. Industrialists have vanished overseas after looting Indian financial institutions since the late 1980s. While social media and his own flamboyant attitude have kept Vijay Mallya alive in the public reckoning, innumerable industrialists have vanished abroad in the past but faced no consequences.
4. RBI’s banking regulation and supervision department needs an urgent shake-up. RBI, which has been caught napping again, has had the audacity to claim that it had alerted unidentified banks about “the need to prevent any ‘potential malicious use of the SWIFT infrastructure’ at least three times since August 2016.” This primarily refers to general homilies delivered by various deputy governors in public speeches. Is there any credibility to a regulator issuing ‘confidential instructions’ that are ignored without consequences? RBI has displayed criminal negligence when it comes to investigating and punishing bank fraud reported by whistle-blowers across the spectrum. Individual officers, bank employee unions and cooperative bank managers, all have made futile attempts to get the regulator to stop bad loans, cronyism, corruption and fraud, over the years. Until just a few months ago, RBI was actively trying to conceal the names of the large corporate defaulters from the Supreme Court, knowing full well that they were published by the All India Bank Employees Association (AIBEA) way back in early 2013, as part of its campaign to ‘stop the loot of public funds and start recovery of bad loans’.
5. RBI’s own Financial Stability Report, released on 30 December 2013, had warned that “Failure of a major corporate or a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates” and their inter-connectedness. And, yet, successive RBI governors failed to come up with a solution. Merely because RBI’s independence on monetary policy needs to be preserved, can it remain unaccountable and bear no responsibility for the enormous cost inflicted on the exchequer?
6. In May 2013, I wrote, “One of the many issues that Moneylife has taken up with the RBI is the need for a technology audit of banks and the systems and processes that they adopt. While RBI’s department of supervision inspects banks, it is not clear if this covers the core banking technology that now drives all big bank operations.” The failure of PNB’s core banking system to reflect SWIFT transactions exposes the bigger danger of this failure to audit the system. RBI has now set up a five-member committee “to look into large bad loan divergences, occurrences of frauds and the effectiveness of various bank audits.” Unfortunately, the committee does not inspire confidence, when the situation has turned far more complex with the entry of payment banks and digital interfaces. We need a central body with technology skills to be entrusted with responsibility and strict accountability to handle this.
Going by the memes, cartoons and jokes and anger on social media, the government would be making a big mistake if it thinks that mere optics such as highly publicised arrests that end in a whimper, after a long-drawn litigation, will work this time as well.
When politicians employ as regulator,with eye sight problem, and even after informing of the problem, do not take up surgery, how he can make regulator accountable.
Every authority is appointed by politician, so how he can escape accountability.
In this case some 13 years ago a nationalised bank punished an internal auditor for refusing to compromise swift security, and he was deliberately put in such a situation for reporting various other irregularities of very serious nature the amount involved being 1000 times the present amount.. Every thing is available with every authority including pgportal, but no action so far. Then are they not accountable? If in your system where a court says since the officer is stickler for rules he can be given compulsory retirement. How you can expect redflaggers?
Initiate action and you can salvage the situation even now. Can the officer get justice even if you want to protect the culprits responsible for such rotten system.
I have also posted a petition to president of India on Change.org. Please sign the petition and force the authorities to act.
Time for PM Modi to introspect
And your last line, that if the present Government thinks that memory will be short in this case also, then they have another one coming.
It is becoming a journalistic style of some to blame the Govt.
One cannot expect the Govt to do micro-micro management. All it can do is to set the principles, rules and guidelines.
The fraudster, as is well known, is always one or two steps of the law.
So now we await the fraudster to find a loop-hole in the linking of SWIFT
with the CBS.
The final signing authorities are responsible.
Status Quoists hv vested intt to safeguard the unscrupulous rich
Once the bank health improves let the salaries be increased.
Employees were sleeping when the loot took place.
BJP is planning to make bank clients (account holders pay) in their new bill
Frauds can happens only if either
(a) RBI has not sensed that various specific types of frauds can/may happen or;
(b) RBI does not have capabilities or;
(c) RBI does not have motivation to detect and stop frauds or;
(d) RBI has been lax in supervision, inspection and audit;
(e) RBI had been under pressure from different vested interests (may be political or business or banks or others) or;
(f) RBI is disconnected with ground realities or;
(g) RBI does not get feedback or act on feedback or whistleblower or;
(h) RBI do not have any scientific threat and risk analysis mechanism or;
(i) RBI has outsourced fraud management to ghosts or;
(j) something else .
It may be any one or mix of various above reasons in any permutations and combinations.
Further, there are normal business process frauds (can say non-technology frauds). There are technology related frauds. But to top these all, there are frauds, which have evolved with the synergy or marriage of business process and technology. Let us say, techno-business frauds. Fraudsters are light-years ahead of regulators in devising these techno-business frauds. Almost all regulators are eons behind in devising strategy to stop or even sensing these frauds. Some frauds may have been being committed even now and the regulator may not even discover then forever unless balloon burst at one point or some whistleblower reports. SEBI was just not aware of HFT and algo fraud till Moneylife exposed it with the help of whistleblower. It would have continued till eternity. Still many frauds may be happening and regulators are either emulating nero or inept.
Unless government effect a paradigm change in the regulator’s work culture, these frauds will be order of the day. Fraudsters are much more smarter than regulator bureaucrats. Does Modi government has the vision and guts to change regulator culture?