The country is yet to recover from the shock of the more than 11,000 crore PNB bank fraud when another scam of huge proportions has come to light. Close on the heels of jeweler Nirav Modi, the owner of Rotomac Pens Vikram Kothari has been reported to have embezzled more than Rs 800 crore. These two back-to-back incidents have opened up a plethora of disturbing questions. But, the most important among these is that how is it possible that two corporates swindled banks of crores of rupees without the knowledge of the management?
Processes are not being adhered to
These two mega frauds have not only acted as an eye-opener for the banking system of the nation but has also laid bare the fact that the scams were a result of a failure of the procedure and technology systems. In the PNB fraud case, two employees of the bank issued fraudulent Letters of Undertaking to Nirav Modi’s jewellery house, which enabled his company to get loans from other banks also. This fraud was being enacted for seven years with alarming secrecy. Not even the higher-ups were aware as to what was going on. It was only with the retirement of an employee, considered to be the key in the fraud, that the extent of the money swindled was unravelled.
How it happened filters down to just one sentence – no one was really paying attention as to what was happening. There was a blatant misuse of the Society for World Interbank Financial Telecommunication (SWIFT) platform and the ledger entries were left incomplete. Many experts have stated that a lack of accountability and standards in the public banking system of the country were reasons for the occurrence of a scam of such proportions. The bank’s technology system was misused. The bank’s internal software system was not linked with SWIFT. In such a situation the employees are required to manually log SWIFT activity, or else the transactions will not show up in the bank’s books. This activity was not carried out by the employee and as such there was no record of the transactions between the bank and Nirav Modi.
Further, banking is a risky business and there is a normal practice of transferring bank officials every two or three years. However, in the case of this particular employee involved in the scam, the transfer policy was violated. The employee remained in his post for seven long years during which he was handling transactions to provide credit to the companies of Nirav Modi. Had the transfer rules been followed stringently, a scam of this magnitude would not have taken place or would have been detected earlier.
Lessons to be learnt from foreign banks
The banking system in the Western countries are also vulnerable to scams, but stringent process and the following of rules ensure that mega scams are avoided. Following the subprime credit crisis of 2008 which severely impacted the economy of the world, international banks have further strengthened supervision and corporate governance. Unfortunately, the Indian banks have lagged behind in this arena. A case in point is the Nirav Modi and Vikram Kothari scams. Moreover, officers in international banks are sent on vacation when peer review is being conducted. This is not the case with Indian banks.
Until and unless, strong measures are not taken, processes are not followed and banks are not made more accountable, such scams will continue to take place at regular intervals.