Now since the cat is out, the banking sector is reeling under extensive pressure unheard off in the 70+ years of banking in India. Punjab National Bank (PNB) is second largest bank after State Bank of India (SBI) which is the first bank to come in the limelight of fraudulent letters of undertakings (LoU). Indian banks which were mostly private till the period of 60s and Indira Gandhi government nationalized all the large-sized banks subsequently in two steps. Corruption and irregularities in the banking sector were the reason to nationalize major banks in India. However, corruption increased substantially once the government took direct control of these banks as political vested interests and unscrupulous businesses jointly started robbing these banks in the name of industrialization of the country. A cursory look at these banks’ annual reports will never suggest about the loans provided to the businesses and industries without adequate collateral security. Individual branch managers of these banks too jumped on the bandwagon of such corruption by extending unsecured cash advances to these crooked businessmen. Most of such loans taken by politically supported businesses never got paid in full and accumulated as ‘non-performing assets’ (NPAs). It is only after Modi dispensation banks started feeling the pinch as most of these NPAs had eaten up into the bank capital.
This corruption and NPAs became conjoined twins and managers who granted such large unrecoverable loans continued to be protected by political masters for long. The Nirav Modi or Mehul Choksi, Vijay Mallya is the symbolic cases presently in front of us and if serious fraud investigation office (SFIO) of the Indian government really become serious, public would be able to get the glimpses of real culprits, bank robbers, and unscrupulous industrialists and business houses who fleeced banks without any remorse to the taxpayers money. PNB, United Bank of India (UBI), Allahabad Bank, United Commercial Bank (UCO), Bank of Baroda and many more banks and managers of every rank of these banks including CEOs need to be investigated. The trail will stop with the political administration of the day. When a simple loan/advance of the bank requires security and collaterals before being granted to an individual, how can such large sums be approved to these people and bankers don’t find an easy way to recover these loans. Business houses work on leverage to make money using cheap capital from banks. If a business makes money, they pay back loans but when for some economic reason if business stops making money these bankers suffer the loses because business house refuses to pay due to economic situations. However, all these NPAs are not because of economic reasons as many unscrupulous businesses inflate their earnings and asset prices to suggest higher net worth to obtain bank loans of undeserving higher values and as intention is to eat up bank loans, in the end, such business houses even sell of assets kept as collateral by bribing bankers at every level and declare bankruptcy in the end. Most of such loans are unsecured resulting in huge losses to these lenders forcing these bakers to write off in the end. LoU issues are very complicated and resorted to very high-level businesses mostly in the bullion and diamond industry engaged in imports/export. Nirav Modi and Mehul Choksi cases are in this category where a banking system loophole of the process was put to the maximum use in the connivance with the bankers of choice.Here LoU issuer system was not integrated with the bank’s core system resulting in bank itself not being aware of LoUs issued to the individuals without regulated system stopping it from doing so. Foreign branches of the same bank issuing such LoUs honored these commitments by allowing Modis nd Choksis to draw foreign currency as paying bank had formal guarantee in the form of LoUs issued by PNB or other banks. PNB in this specific case was heavily exposed for risk of non-payment by these businesses and worst of all PNB itself was not formally aware of its core system about these LoUs issued.
Is PNB alone in this game of issuing LoUs or more such banks are to be exposed in future is in the hands of bank regulators and RBI. RBI or SFIO must pay serious attention in looking into compliances of their own instructions by the bankers. PNB scam is not alone as still several skeletons are hidden in the cupboards of these banks where compliances are lacking or overlooked by its own internal auditors for some reasons. Even an external auditor questioning the extensive credits granted by PNB to Nirav Modi was placed under wraps by its own audit committee!! I am sure many other banks have similar clients whose letters of credit or LoU are unrecorded in the core systems. Indian SFIO is the prime agency but least taken care of resulting in inefficiencies creeping into its operations. Very few people are aware of its existence or strength. However, like any other governmental agency it has its drawbacks not easy to be corrected because no political master wants to have spook breathing on his/her neck with independence in its operation.