PNB scam: Blame it on the system, yet again

Rather than fixing responsibility for the Nirav Modi-PNB scam, the government has been pointing fingers at systemic failure

Has the government, in damage-control mode, decided to contain the Rs 11,300 crore Punjab National Bank (PNB) scam as one caused by systemic failure without holding anyone in the Finance Ministry, or the Department of Financial Services under it, accountable? Simultaneously, has it also decided to abandon its earlier strategy of trying to project the fraud as one that had occurred during the UPA regime, which has surfaced now under the watch of a “vigilant” government?

Two statements made by Union Finance Minister Arun Jaitley last week clearly seem to suggest that the government has significantly altered its approach. First, while addressing a meeting of the Association of Development Financing Institutions in Asia and the Pacific in New Delhi on February 20, Jaitley apportioned the entire blame for the scam on lax bank managers, rogue employees and auditors, both internal and external. There was no mention of any governmental failure —past or present.

Then, four days later, on February 24, at the Economic Times Global Business Summit in the capital, he reiterated what he had said, and added that it was unfortunate (that) politicians were held responsible for such frauds. Jaitley said: “Regulators have a very important function. Regulators ultimately decide the rules of the game and regulators have to have a third eye, which is to be perpetually kept open. But unfortunately, in the Indian system, we politicians are accountable, the regulators are not.” Again, there was no mention of any failure in governance.

Ever since the finance minister first shifted the goal post on February 20 by holding the PNB managers, auditors and regulatory bodies (read the Reserve Bank of India) responsible, government-friendly media channels, which were until then blaming the UPA for the fraud, quickly changed their script. Spirited efforts to link Congress leaders with Nirav Modi and his uncle Mehul Choksi, the two conspirators in the scam, were put into cold storage. Instead, the focus shifted to efforts being made by the government to recover the lost monies. Raids on establishments run by the uncle-nephew duo took centerstage. So too did the fleet of luxury cars and the cache of high-end watches that the enforcement agencies seized.

Bank unions have asked the government to stop blaming a few officials in one PNB branch in Mumbai for a Rs 11,300 crore scam, and to examine the failure of the RBI, audit agencies, senior bank executives and crucially, the Finance Ministry itself, which allowed such a scam to happen under its watch

Almost as if on cue, Central ministers, government spokespersons and BJP leaders, who had repeatedly and vociferously blamed the UPA for the PNB scam, suddenly decided to hold back their fire. What caused such self-restraint? It may well have been the realisation that digging up the past could end up opening a can of worms that could embarrass the government, according to a former Enforcement Directorate (ED) official.

“Some of the suspect Letters of Undertaking (LoUs) issued when the UPA was in power, not just by PNB but also by other banks, may have been to companies (that are) close to the present government. Any detailed investigation will turn the spotlight on such entities that may have funded the BJP in the last election,” he says. According to the former ED official, one source of funding for all major political parties is through friendly business houses securing huge bank advances or loans of which a part is passed on to the political parties. The routing of such funds is through instruments like Letters of Credit and LoUs (a bank guarantee that facilitates forex payments abroad for Indian importers), which were used by Nirav Modi and Mehul Choksi,” he adds.

Demands for fixing accountability

Also, investigations in the aftermath of the PNB scam have thrown up names of several, lesser-known banks based in the UAE, which have been used to discount Letters of Credit. These include, among others, Dubai Bank Kenya, Trade Chartered Bank and Central Banking Corporation. Congress leader Kapil Sibal alleges that these banks were used to encash monies, which were then routed back to India. He claims that names of several prominent people will tumble out if investigations are pursued.

In fact, Sibal, at a press briefing on February 24, demanded that Prime Minister Narendra Modi order a forensic audit by the RBI of communications sent in the last five years through the SWIFT messaging system (which confirms to banks abroad transactions as well as LoUs and letters of credit issued in India) to ascertain which of these pertained to genuine transactions and which did not. He also demanded that accountability of the Finance Ministry, the RBI and the management of defaulting banks for the PNB scam be fixed in the next 60 days.

Bank unions such as the All India Bank Employees Association (AIBEA) and the All India Bank Officers’ Confederation (AIBOC) have in turn asked the government to stop blaming a few officials in one PNB branch in Mumbai for a Rs 11,300 crore scam, and to examine the failure of the RBI, audit agencies, senior bank executives and crucially, the Finance Ministry itself, which allowed such a scam to happen under its watch.

“The role of the politician is of course there but by implication. But what about the RBI, what was it doing,”AIBEA general secretary CH Venkatachalam told SouthWord. “What about the bank boards and the audit agencies and the Finance Ministry? They also have to be held responsible and accountable. There is no point in blaming the entire scam of such a magnitude on a few junior officials.”

DT Franco, the general secretary of AIBOC, was equally critical of the government and specifically asked why was the system's failure not being analysed. “What is the role of the government and its policies which cause system failures and scams? In India, the political economy circumscribes the quality of regulation and internal control policies at banks. It is important to appreciate this while fixing responsibility for the bad loans and large frauds at public sector banks,” he said in a statement.

Deaf to feedback from within

This focus on the government fixing accountability, say bureaucrats, is what has made the BJP suddenly see red. Its leaders could perhaps point fingers at finance ministers during the UPA regime for the PNB fraud, but then what about Arun Jaitley under whose watch the LoU scam continued unchecked? In fact, the majority of the PNB cases being probed by the CBI involve LoUs issued in 2016-2017. Moreover, PNB, like all other public sector unit (PSU) banks, had on its board a serving IAS officer as the government's nominee. So his role would also come into question.

Venkatachalam also raises questions about the government wanting to bypass norms in running PSU banks to suit its own purpose. The functioning of the board of directors, he points out, has been progressively diluted with power being concentrated in the hands of committees. He also notes that no appointments have been made since 2014 for the post of Workman Employee Director on the boards of PSU banks. His union has repeatedly taken up the issue with the Finance Minister.

“Such appointees would not only present the problems faced by the staff, but also act as watchdogs. I am not claiming that we could have prevented the PNB scam, but it shows the attitude of the government towards feedback from inside the organisation. Sometimes such feedback can help the bank plug loopholes and address security issues.” says Venkatachalam. According to the AIBEA, all 20 PSU banks currently have no Workman Employee Director on their boards. The post in PNB has been vacant since March 2016.

Meanwhile, investigations into NPA and bank fraud cases, which have suddenly been activated have begun throwing up new names. Among them is that of Gurpal Singh, associated with Simbhaoli Sugars Ltd, who is reportedly the son-in-law of Punjab Chief Minister Captain Amarinder Singh. The fraud of Rs 97.85 crore and default of Rs 110 crore both involve the Oriental Bank of Commerce. If his involvement in the scam is proved, it will only go to show how people with political links can influence and secure favours from banks.

This, however, does not take away from the core issue of fixing responsibility. It is convenient for the political class, cutting across parties as well as governments, to blame every bank scam on “systematic failure.” We have heard of the system failing since the time of the Harshad Mehta fraud in the early 1990s. We are now told that the same undefined phantom caused the PNB scam. The big question is, are those running this system never accountable?

Prof Yashwant Sinha’s easy tutorials for Indians on Modinomics
For every Nambi Narayanan, there are countless others whom the system fails
Were Jan Dhan accounts used to launder black money?
Editor’s Pick More