PNB Rs 11,000 cr fraud: Banks reward wrongdoers if they make profit, cry foul when there are losses, says former RBI deputy K C Chakrabarty
The PNB fraud is a result of long-followed poor risk management systems and inefficient auditing practices
Punjab National Bank (PNB) is in the middle of a Rs 11,000 crore fraud case. The case, allegedly perpetrated by billionaire Nirav Modi, pertains to certain PNB bank employees colluding with the businessman to issue unauthorized LoUs (Letter of Undertakings) against import receipts, which were, in turn used to borrow money from foreign branches of some Indian banks. The case is being investigated by the Central Bureau of Investigation (CBI). Modi is said to have fled the country even before PNB filed the complaint with law enforcement agencies. The extent of fraud has taken everyone by surprise including those in government and the Reserve Bank of India (RBI). A political blame game is on between the ruling Bharatiya Janata Party (BJP) and Congress parties.
In an interview with Firstpost, K C Chakrabarty, former RBI deputy governor and former chairman and managing director of PNB said the fraud should not be seen in isolation. This is a result of long-followed poor risk management systems and inefficient auditing practices, Chakrabarty said, adding there needs to be proper risk-based audit and supervision in place to prevent such frauds.
Excerpts from the interview
What is your sense about the PNB fraud case?
I don’t want to comment on this specific case of PNB. I do not have specific details. But, in general, there is tendency in the banking system with respect to such transactions that unless a transaction is complete and money comes back, nobody reports. I don’t believe in such an approach. A Letter of credit is between two customers in two different countries. You (banker) are doing this to the same customer in two different countries. You should have directly taken that loan from that bank. Whenever such transactions happen, a banker should become very cautious. Typically, such things happen if a bank does not have enough funds. But then you have to be very careful.
Will you call it a case of fraud or an instance of inefficiency?
This is definitely fraud because the branch manager has no sanctioning power. That is what PNB management is saying too.
How could this happen over a period of years despite periodic monitoring?
I would not be able to comment on that because I don’t have the details. But, how has the money gone without getting reflected in the books? The entire thing appears to be fishy. Indian banks have no risk management capability or risk management system in place. If there is a risk management system and so long as you work within that framework, you will be protected. But what happens here is, if you (bank executive) violate that framework and if you make profit, you are rewarded. When you lose money, you create such a hue and cry. It is a culture issue. If you are doing any transactions beyond your framework, you should be immediately punished.
Is there a systemic problem?
We don’t have a risk-based inspection system. If credit appraisal and sanction were segregated from credit operation, this (PNB-like frauds) would not have happened. The best practice is to segregate credit operation from risk operation and credit appraisal process. That is what we call centralized credit sanction. If that was in place, this would not have happened. But we do not believe in that culture. Unless the customer comes and salute me and give some gifts, as a bank executive I am not happy.
Is there a problem in the manner auditing is done in banks?
In a bank there are thousands of transactions happening every year. In many cases, the audit is bogus. Whatever the branch manager wants, that will be in the audit. We have not made anyone accountable, hence such frauds happen. Audit has to be risk-based. Whatever statement the branch manager prepares, the auditor follows. This needs to change. The risk management systems that banks have currently is primitive, it is intuition-based, it is not institutionalised. Credit functions were always centralised. When this was decentralised, the systems and processes were not improved. When the manual system was there, there was manual inspection and manual audit. But now everything is computerised and we somehow feel that whatever computers do is correct.
What can be done to avoid such situations in the future?
What we need is proper governance, proper risk management systems, risk-based supervision, risk-based audit. Risk management system is the key. Also, you have to make the management, regulator and policymakers accountable for that. This can happen in any bank and it is only accidental that it has happened in PNB.