The story of Lalit Modis, Viay Malayas, Vikram Kotharis, Nirav Modis is neither unique nor a stroke of unprecedented financial insights. There are other cases. To cite several, will require much time and space and may not necessarily contribute to the understanding of the situation. An illustrative one : it is reported that the Economic Offensive Wing of Mumbai Police issued a red corner notice against Raj Kumar Basantaniin February 2005. He fled the country with his family. Interpol had been intimated and US Police were said to be looking for him. He managed to get away with Rs 150 crores. He had floated a company called Sound Craft Industries in 1985 and offered interest rates going up to 16%. 1400-odd investors had been conned. He had offered a single flat as a guarantee to different banks which reportedly included Vijaya Bank, OBC, Dena Bank, Punjab & Sindh Bank and more.
At the time of the writing of these lines, news is coming in that RBI has clamped down on LOUs. Nothing short of a fraud which is now placed at Rs. 13,580 crores as of March 15, moved the RBI to action. Wonder doesn't stop there. The early reports were that two fairly low ranking managers of the bank had been suspended. As time passed, it stretched people's credibility that a fraud of this magnitude would be exclusively a matter of PNB's mid-corporate group branch which normally, handles a portfolio between Rs. 50 crores to Rs. 500 crores.
There are two levels of audit besides the spot audit and the surprise audit which are carried out randomly. Reportedly, subsequently, the CBI did question Sunil Mehta, the CMD of PNB and Brahmaji Rao, Executive Director. Usha Anantasubramanian, now the CMD of Allahabad Bank had key roles, in PNB, during the period this was happening. An internal chief auditor of PNB, apparently, was arrested as was a GM.
This catalogue of facts does not need any comment. However, two things come to attention.
Is it true that our regulatory system wakes up only when there is an A-grade crisis? Why just banks, even in the aviation sector, the DGCA woke up almost posthumously to the failing engines of P&W. Its counterpart in Europe acted much earlier. And news newspaper report has it, that at least one such airline which went ahead with using flawed engines is in the line to bid for Air India! Spreading the word on business ethics? The examples are too many. There are other questions which beat most compulsive 'positive thinking'.
Three levels of audit failed to detect what apparently began in March 2011 till it burst in January 2018. In a sector where even the wishes of the superiors determine the exercise of choices of the subordinates, for nearly 8 years a few 'underlings' manipulated the system with a panache of which the top brass of the company did not even get a whiff!?! If this not a criminal negligence and dereliction of duty on the part of the top, what is? Now of course, investigations are on and the classical manner of shutting the door when the horse has bolted, the RBI has constituted a committee under the chairmanship of a former member of its Central Board of Directors.
Nirav like others in the chain of illustrious perpetrators of apparently fraudulent moves, is very well connected. He not only obliged but charmed many. The diamonds are the darlings of the well - healed. They are used for many purposes other than just stocking wealth. They are used for display of having broken into the charmed circle. They are used to woo and sweep the aspiring off their feet. They are used to cajole and more. Their power is unparalleled.
Under such circumstances, diamond financing becomes a crucial exercise. Diamond financing is very much a management of expert systems. Many humble branch managers of the Indian breed of Public sector are pathetically ill equipped to handle the nuances. There are specialists banks like ABN AMRO dealing with this. Briefly, AMRO Bank NV was operating in India since 1921.
In October 2007, ABN AMRO Holdings NV was acquired by a consortium. The details are complicated for the context here, but in simple terms through a process of acquisition, resurrection as bank entity and more, the ID and JG came under ABN AMRO Bank NV. This did not touch India where this business of ID and JG was under Royal Bank of Scotland (RBS) NV. RBS announced its exit from India and Asia in February 2018 for this business. It is reported that ABN AMRO Bank has expressed interest in bringing this business under its banner in India. Reportedly, they are making good progress. In Antwerp too, there are specialised banks like Antwerp Diamond Bank. The story doesn't end there. The columns have it, that the Antwerp Diamond Bank, singly, has US $ 20 Million of NPAs to four large Indian firms. So be it.
The larger question is how does the plea for privatisation of Public Sector Banks come as a solution to this state of affairs? There are some large range consequences which, are only beginning to be comprehended. Whether it is this scam or that fraud, one hears so much of noise when they hit attention. Clearly, they don't happen in a day. The miracle is not just the reported innocence of the top brasses about what is going on beneath their nose. The miracle is not just the utter failure of revenue intelligence systems on which so much is being said. The real miracle is the alacrity with which all agencies discover their wit and feet, when the horse was bolted.
One repeatedly experiences this in various scams, too well known for repetition. The author of these lines has a noted economist friend who quipped, when he learnt of writer's reflection, on the Nirav Modi epic. He said, "You do the writing. There is nothing left to discover. The numbers of interest groups who have their hand in the till are so large that ultimately, it is only a few small fries that will get fried".
Not so long ago, in the chain of public financial institutions which have promoted the interest of private business empires was the case of UTI. The quasi - public institution nearly collapsed and those who collected the booty were far too well connected to be even ticked off. The prime players protected themselves with the theory that 'if they were touched they would spill the beans'. A few of them are still alive and kicking.
The newspaper's report that the RBI Governor is ruing the limited powers of the RBI has over PSBs. He is clearly out of touch with ground realities. Someone tell him of the anxieties and lordships the RBI teams strike when they camp in the PSBs for examination purposes! In such place, one is almost tempted to go to the RBI team for 'confessional' just to keep safe!!
In an era, when ethics is mortgaged to power, in hope of future munificence to follow, one needs to focus on institutional fault lines. Satyam got the Golden Peacock award for good governance and PNB an award from 'vigilance' from a Government agency. Scape - goating a few, to respond to a public outrage is like pouring oil over troubled waters. The malaise continues. It is believed that for years Chairman after Chairman of certain banks manipulated entries to cover up or defer NPAs accounting. Boards either chose not to understand or simply looked the other way.
The PSB's are packed, at the board level, with auditor nominees. Who explains the lapses? It provided relieve to such creative Chairmen to retire 'peacefully' but the nemesis caught up with the institution. Much of these frauds are rooted in the belief that there is so much inaccuracy in record keeping anyhow, that before it would be discovered, one would be putting ones passport to great use!
The narrative may not have changed much but the times have and there lies hope.