“Niravta” of Banking System Stolen, Time to Do “Control+ALT+Del”

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Amit Bhanot, Managing Editor, Governance Democracy & Politics Magazine, March Issue

Mid February 2018, when everything in Indian economy was going fine and everyone in the financial space across the globe was touting about India as the sweat spot, a devastating financial crisis struck Indian banking system and snatched away all the “Niravta” (peace) of Indian economy. At the helm of this crisis was the so-called diamond king Nirav Modi, who brandish himself to be a brand more than a human being. As far as his wrongdoing is concerned, he actually exploited the omnipresent vulnerability of great Indian banking system, which still is living in medieval times, in the supersonic age digital revolution, especially the PSU Banking space. No wonder, when it comes to business, corporate chose private and foreign banks as partner and when they what to do frauds and scam, they head towards PSU banks. And examples are plenty, right from Harshad Mehta in early nineties to Ketan Parekh in late nineties to Vijay Mallya few years ago. Nirav Modi and Mehul Choksi have just added another chapter to this ever increasing list. Already this “Baap of all” scam swelled passed whooping Rs13000 crore and experts are of the opinion that it could go up to mammoth Rs. 30,000 crore or more and it may have many more parallel as well. RBI data fears that this fraud will jack up the loan frauds figure to Rs. 61260 crore, really a havoc.

Importantly, when it comes to the wrong credit decisions, carelessness and marathon fraudulent transactions, India’s incompetent public sector banks (PSBs) seem to fall as an easy prey to shrewd and celebrity status conman (you can read businessman). Though this happen since ages as these conman usually uses their celebrity status to woo banking system and even uses their political connections (as a partner in crime) to pressurize banking management to give them loans (or Letter of Undertaking in Nirav case) without ample collateral. So the result is in front of us, they first exploit the banking system, get away with far more money than what they have earned all through their life or pledged and then easily scoot to some foreign soil by exploiting much more weaker legal system of India. Past examples clearly shows that this is exactly the way a con-businessman sees India and its financial and legal space. Clearly Nirav Modi style of modus operandi to defraud banks brings back memories of the 1992 Harshad Mehta scam. Mehta, another smart fraudster, managed to get fake bank receipts from select banks and draw money from other lenders after convincing them that those receipts were backed by government securities, while in reality those were worthless papers. Mehta used this money to rig the stock market, jack up prices of certain stocks and sell his holdings at the peak leading to a market crash.

In the case of 2001 Ketan Parekh scam too, bank funds were routed to the stock market. Then came the Vijay Mallya-Kingfisher loan default case, where the billionaire liquor king secured Rs 9,000 crore worth bank loans (including the accumulated interest) on his personal guarantee from a clutch of 17 banks and allegedly diverted the money to other ventures.

In all these cases banks failed to ensure there is enough collateral to back the money they lent. The risk management systems failed miserably from the branch level to board level to identify the impeding balance sheet disaster. Experts feel that usually in the hurry to garner business, public sector banks conveniently forgot the golden rules of the game and looked at the celebrity status of borrowers rather than at their assets against the loan. It simply means that a disaster is inevitable, only its timing is not sure. But can Indian financial sector again still be able to coop up with this scam too, as in the past and gather itself up and start afresh on the growth path? I think it is difficult now.

The reason is quite simple, the stakes in the banking space are quite high and the dependency of banks and financial institutions are much more than in the past. Also in this digital era there is nothing called “one-off” case, as mooted in the Nirav Modi case. If one branch in Mumbai can exploit the LOU route, then how come we can expect that nobody else in the country wouldn’t be aware of this lacuna of the banking system. Importantly in ordinary course of business, the ripples of such persistent irregularities cannot escape the attention of staff working in the branch for such a long duration. Ensuring presence of perpetrators of fraud all the time in the branch is difficult for such a long duration to maintain chain of frauds, but it has happened, putting focus on the morality issue of banking staff in India. Intrestingly banks are now equipped with better technology and risk management tools–SWIFT, CBS, Concurrent and statutory audits, but none of this worked to identify and tackle frauds committed using age-old modus operandi. Certainly this is an alarming situation.

Still Indian Government and RBI is investigating into this scam as one off case, which can have far more repercussions than the original scam. In my view there is an urgent need to look at this scam from a wider perspective and whole banking and financial space should be rebooted asap. In fact Control+ALT+Del is the need of the hour for Indian banking space other wise it will surely hamper Indian story for coming 2-3 decades. Mr FM are you listening?

 

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