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PNB scam should pave road for financial transparency

FEBRUARY 20, 2018

By TIOL Edit Team

DEFRAUDING of Punjab National Bank (PNB) by two leading diamond business groups in collusion with bank staff has once again turned the torchlight on the rot in the financial system. Unfolding frauds have also underscored the need for checking laxity in the Government's complaints and grievances resolution system.

It is disgusting to find that the frauds of various dimensions keep cropping up in spite of recommendations of numerous committees set up after eruption of a major scam in the system.

Exhaustive guidelines by financial sector regulators in the instance, by Reserve Bank of India (RBI) have fallen flat before scamsters.

Both Nirav Modi and Gitanjali groups thus worked their ways through the system with help of certain PNB officials to get loans through fraudulently created letters of undertaking (LOUs) and other forms of guarantees. The possibility of more such misuse of liberalized credit regime by other diamond and jewelry companies should not be ruled out. One has to keep crossed about undetected or hushed-up misuse of export-import credit regime by firms in other sectors.

RBI's Master Circular on Guarantees and Co-acceptances (MC) that include much-abused LOUs, issued from time to time, provides for internal controls.

RBI has repeatedly emphasized that banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees, to obviate the possibility of frauds in this area.

MC dated 1 st July 2013, for instance, says: "Proper records of the bills co-accepted for each customer should be maintained, so that the commitments for each customer and the total commitments at a branch can be readily ascertained, and these should be scrutinised by internal inspectors and commented upon in their reports".

It adds: "AD (authorized dealer) banks are required to furnish data on issuance of guarantees/LoUs/LoCs (letters of credit) by all its branches, in a consolidated statement, at quarterly intervals" in specified format to Chief General Manager-in-Charge, Foreign Exchange Department, RBI.

If internal audit of PNB was vigilant, scam would have been detected, if not prevented, in its infancy. That internal audit and statutory audit failed to spot irregularities speak volumes about multi-layered controls.

It here pertinent to quote PNB's letter dated 13th February on Geetanjali to CBI. The letter was released by the Congress Party, which is acting as investigative journalist.

PNB has told CBI that RBI has prescribed 90-days validity for credit sanctioned for import of diamonds. The letter says: "However, in most cases, the credit allowed under referred LOUs is much beyond 90 days. For outstanding buyer's credit, the LOUs were established for about 360 days ab-initio".

PNB adds: "This should have evoked suspicion in the minds of overseas branches of Indian banks expending buyer's credit. These banks never raised any alarm on violation of RBI guidelines and continued to provide funding against fraudulent LOUs"

PNB now says that "There are several discrepancies in LOUs which could have been easily detected by ordinary due diligence."

How do citizens know that due diligence in evaluation of loan proposals is short-circuited, shoddy or deficient even in genuine cases of non-performing assets (NPAs)? There is no way to know except wait for a scam to burst open in public domain or get tidbits of information on NPAs from the media.

The gigantic mountain of NPAs, detected and undetected frauds is largely due to obsessive secrecy maintained in the financial services industry.

Banking secrecy is governed by several laws. These include Reserve Bank of India Act, 1934, The State Bank of India Act, 1955, The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and The Public Financial Institutions (Obligation as to Fidelity and Secrecy) Act, 1983.

Banking secrecy serves as ideal ecosystem for frauds. It also serves as facilitator for laxity in enforcement and monitoring of exhaustive guidelines laid down by Reserve Bank of India for each and every aspect of banking sector.

Successive Governments have resisted lifting of veil of secrecy and have shown negligence towards the need to amend the relevant laws, if not junk them altogether. If Government wants to avoid more frauds and if wants to rein in NPAs, it should amend laws to limit secrecy to only deposits and put lending under public gaze.

Financial transparency would act as restraint on both lenders and borrowers from compromising with lending norms. Transparency would also make it difficult for borrowers to divert or misuse funds. Transparency would also show whether internal auditors are not lax in their job as happened in the instant case.

Time has thus come for the Government to bite the bullet to strengthen the fragile stability of financial sector. And the best way to start would be to make public , agenda and minutes of lending committees of individual banks and consortium of banks.

Similarly, the Government should make public cost audit reports, serious frauds investigation office reports and RBI's special audit report of banks. Such reports contain details of irregularities and lapses detected in different entities. The very disclosure and analysis of such flaws would make officials concerned more vigilant. The disclosure would also minimize the scope for recurrence of same or similar frauds.

This transparency mantra applies equally well to appellate authorities in all sectors that receive complaints from aggrieved companies. PNB fraud case raises grave issues about the working of complaints resolution system in the Government.

The first serious, detailed complaint against Geetanjali was filed by certain entities on 7th May 2015. The complaint was addressed to Ministry of Corporate Affairs. It was also sent to Prime Minister's Office (PMO), SFIO and Enforcement Directorate.

The complaint mentioned about Geetanjali cheating PNB and other banks. It also warned that the main promoter of Geetanjali group would escape from India with over Rs 4000 crore loan default.

The complaint drew parallel between Geetanjali promoter and Winsome Diamonds group whose promoter allegedly absconded after cheating the financial system to the tune of Rs 6500 crore.

The fate of such complaints against Nirav Modi and Geetanjali groups are not known. Did anyone in the Government including PMO was colluding with entities against whom allegations were made? Were the officials slow in handling complaints? Was there deliberate oversight of brewing fraud?

Ethics demand that PMO should order an independent probe in the instant case under the supervision of the Supreme Court. Apart from the probe, the Government should consider a mechanism for time-bound resolution of complaints. The outcome of complaints should be made public to make grievances handling system credible.


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