PNB scam: There’s more than meets the eye in Usha Ananthasubramanian’s last minute dismissal; but why only her?

There is no known precedent to any central government choosing to dismiss a state-run bank's managing director and chief executive on her final day in office. So, that honour has been bestowed upon Allahabad Bank’s sacked chief, Usha Ananthasubramanian.

Not for what she did at that bank, but in connection with her earlier stint at the scam-hit Punjab National Bank (PNB), where she allegedly failed to exercise her powers as MD & CEO, paving the way for the uncle-nephew duo of Mehul Choksi and Nirav Modi to allegedly defraud the lender of roughly Rs 14,000 crore using forged trade credit instruments. Ananthasubramanian was PNB's chief between August, 2015 and May, 2017.

The government has authorised the Central Bureau of Investigation (CBI) to prosecute Ananthasubramanian in the case.  This means Ananthasubramanian will now have to prepare for a long legal battle.

Usha Ananthasubramanian, former MD, PNB. Pic courtesy: Allahabad Bank website

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So, what is the message the government wants to send to Ananthasubramanian’s colleagues in the banking industry by sacking her on retirement day, and denying her of a graceful exit? If you try to translate the action into words, it would read something like this -- if you mess up, you can’t get away on easy terms, even if it is the last day of your three-decade long service. Well, that’s a stern message to go around and no senior banker in any state-run bank will take his position for granted and act as a feudal lord. That should bring in some sense of sanity, accountability and responsibility to the post, not saying all of them were irresponsible, but certainly a good number were.

There is no denying that for decades, state-run banks operated like feudal institutions only with a few exceptions. In their approach and in the way they operated, these institutions were far different from private and foreign banks.

The sense of comfort given by sovereign backing, short-tenures of top level staff, micromanagement by the incumbent political leadership — all turned these firms into government vehicles that exist primarily to carry out the agenda of political populism. One could argue that, in hindsight, the nationalisation of these banks proved to be a mistake considering the erosion in operational efficiency and bad loan management. These institutions were endlessly prone to the ‘begging bowl syndrome’, the symptoms of which manifested every year when these entities lined up before North Block for survival capital.

But, the question here is why only Ananthasubramanian?

The CBI chargesheet says Usha Ananthasubramanian and some other senior bank officials were in the know of the fraud, ignored circulars and kept "misleading" the Reserve Bank of India (RBI) about the true state of affairs involving PNB Dubai and the Indian Overseas Bank, Chandigarh .

“Yet they did not take any corrective action and remained silent spectators. This facilitated continuance of the fraud resulting in wrongful loss to the PNB," the CBI said in the chargesheet, according to the PTI report.

There are a few questions that are worth looking at here:

First, it could be true that the continuance of the fraud was facilitated by Ananthasubramanian. But what about those who headed the bank before her while the fraud was on? Ananthasubramanian was PNB’s CEO between August 2015 and May 2017 while the scam began in 2011 as admitted by the bank management at the first press conference where it announced the scam. Between 2011 and 2015 there were two other CEOs at PNB — K R Kamath and Gauri Shankar. Were they asked about the letter of understanding (LoU) transactions by the RBI or CBI? If the charge is of ignoring banking rules, i.e. prudential norms governing the LoU transactions, shouldn’t it apply to all?

Second, the charge against Ananthasubramanian and other officials is that they ignored RBI circulars and responded to the central bank's queries in a misleading manner since October, 2016. Back in 2011, when Nirav Modi first colluded with bank officials to begin the chain of fraudulent transactions using the now-infamous LoUs till 2016, was the regulator then blissfully unaware about of the problems in LoU-linked transactions? Doesn’t it mean that the government, the RBI and various managements have, from time to time, failed miserably to guide the bank within the right risk-management framework?

Third, what about all the other biggies in the banking system who committed the same mistake? There were many other banks who may not have linked their core-banking software platform (CBS) to the SWIFT software -- a flaw that Nirav Modi used to his advantage in the scam. Modi chose PNB to commit the fraud but doesn’t the charge of ignoring RBI norms apply to most other public sector banks (PSBs) as well?

Fourth, what was the motive of Ananthasubramanian, and the others, mentioned in the CBI chargesheet for facilitating the fraud? Did they receive any kickbacks?

The problem is that the PNB case is seen in isolation even now by investigators. This is clearly a systemic issue where risk management systems have failed when it comes to compliance. Merely passing the blame to the SWIFT software, its disconnect with the CBS system and Nirav Modi’s criminality won’t help. This is a cardinal mistake.

PNB should be the trigger for an overhaul of the manner in which risk management systems function within the banking system. Ananthasubramanian’s dismissal will certainly nudge other bankers to pull up their socks. But investigators, the government and the regulator must ensure that they don't look at the PNB scam in isolation.

(A part of this piece was published earlier on Firstpost)