The great jewel scam. Is it system failure?

The great jewel scam that is rocking the nation has opened up a Pandora Box on how the banks have become soft target for unscrupulous scam creators in connivance with the bank officials. It is apparent from the modus operandi of the operations that it is a systematic, well conceived and planned loot of the Indian Banking system. It is termed as 'system failure' by many. It is not the first time that the banks in India have become victims of such fraudulent transactions affecting the performance of the banks jeopardizing the public investment in banks. More than that, it also erodes the public trust in the banking industry particularly that of nationalized banks.  It is reported that public sector banks alone lost a total of Rs. 227.43 billion due to banking fraud between 2012 and 2016. Further it is reported that between April and December 2016, a total of 3870 fraudulent cases took place involving Rs. 177.50 billion, which were facilitated by 450 private and public sector employees. 

The reminiscence of this new scam and the scams that took place earlier only points to the callous and apathetic way the bank officials handle the credit port folio and investments by banks particularly foreign exchange transactions. Is it system failure? If it is so, can the system fail repeatedly?   'Forbearance is ostrich - like behaviour, hoping the problem will go away. It is not realism but naiveté.' 

Reserve Bank of India is the regulatory authority for the banks and financial institutions in India. The notifications issued by RBI on banking system and procedures are mandatory for the banks to comply with. Can the system and procedure fail simply by itself? It can't. It is the employees that implement the system and procedures who are responsible for the success or failures of the system and procedures. The present jewel scam has come to light by sheer accident when the LOU was presented for renewal and had it been renewed the scam would have been buried also. It also reminds us of the Harshad Mehta rip-off.  RBI has been issuing circulars from time to time regulating the banking transactions and guiding the banks to follow system and procedures. The following are some of the more important circulars issued by them regarding the risk management.

(a) Internal vigilance.
(b) Risk management system in banks.
(c) Risk management system - Role of Chief Risk Officer.
(d) Risk based supervision-follow up risk management system in banks.
(e) Frame work on dealing with loan frauds.
(f) Guidance note on Management of Operational Risk.
(g) Compliance functions in banks.
(h) Concurrent Audit System in Commercial Banks - Revision of RBI's Guidelines
(i) Guidance note on risk-based internal audit.

The notifications are updated by RBI periodically depending on the need and public interest. Yet the mystery is how the banks allowed the system failure?

The after effect of this scam is that some of the executives and employees heads will be rolled down and the Bank Management would try to find more scapegoats. But can the management represented by its Managing Director and members of the Board escape their responsibilities and accountabilities? The Damocles Sword of Vicarious Liability is hanging on their heads too. Considering the nature of transaction and the quantum involved, the power to sanction such huge loans rests with the Board of the Bank.

The compliance functions as announced by RBI states,

'Responsibility of the Board of Directors: The Board would be responsible for ensuring that an appropriate compliance policy is in place in the bank to manage compliance risk and also overseeing its implementation. It has to ensure that compliance issues are resolved effectively and expeditiously by senior management with the assistance of compliance staff. If necessary, the Board may delegate these tasks to the Audit Committee of the Board (ACB) or a specific Board level Committee constituted for the purpose. The Board or ACB or the Board Committee, as the case may be, should review compliance function on a quarterly basis. A detailed annual review should also be placed before the Board / ACB or the Board level Committee. In order to ensure there is no potential for any conflict of interest and that the activities of the compliance function are subject to independent review, the compliance function and the audit function of the bank should necessarily be kept separate'.

It is amazing and shocking to note that the perpetrators have been indulging in such nefarious banking transactions since 2010 as per the report circumventing detection during the various inspections by various entities including RBI that might have taken place during the relevant period. The chance detection of the jewel fraud raises yet another question whether it is only a tip of a bigger iceberg. Such exploitation of the system and procedures have been taking place from to time creating ripples only for the time being creating momentary action only to be died down soon and complacency and apathy takes over leading to yet another scam. History of banking has proved this.

The overall impact of the scam will be known only when the entire transactional details are evaluated to arrive at the quantum of debts and the involvement of other banks in this scam other than PNB and also the securities available to recover the loans and losses and also the chances of recovery. So what is the solution to arrest such incidents from recurring?

Management of non-performing asset (NPA) and prevention of fraud particularly the cyber theft is one of the foremost challenges of the banks and financial institutions. Most of the time while finding solutions to this issue, the more important aspect of human resources is being side tracked and concentration is more on the technology, rules and regulations and systems and procedures. Ultimately whatever that is being planned and programmed are to be implemented by the people.

Hence the basic approach should also be to include creating effective and efficient human resources to successfully implement the plans and programmes and system and procedures to arrest the deteriorating trend in the management of NPA accounts and frauds. Other than the technological delivery of the banking services, the credit management portfolio particularly credit monitoring in the banks is neither efficient nor effective which include assessment and execution of the tasks involved.

Integrity and honesty of employees and executives are most important in any organisation for its success. Today, the knowledge worker should be allowed to take economic decisions, for which he should know what sort of performance and result the bank is looking for. The most important aspect is their ability to build and lead an effective and cohesive human resources team for which understanding the objectives and goals, self as well as the bank, the demands of economic performance are essential pre-requisites.  In short, it is the empowerment of work force to produce the desired results.

'Understanding is needed as much for the immediate task of effectiveness today as it is for work on the future many years hence. It is a necessary tool for any executive who takes seriously his entrepreneurial responsibility. And it is a tool which neither be fashioned for him nor wielded for him. He must take part in making it and using it. The ability to design and develop this tool and the competence to use it should be standard equipment for the business executive.' To be more than a figure head for the talents given in his keeping, the chief executive of the bank and the financial institution should accept his responsibility for making the future happen. It is the willingness to tackle purposefully this task of making the future to happen, the most important task of banks and financial institution that distinguishes the great bank and great financial institution from merely competent one, and the banking and financial institution builder from the executive-suite custodian.

Last but not the least, is it not the time for the government to give complete autonomy to the public sector banks devoid of any government interference to raise capital with freedom to take their own commercial decisions to manage and run the bank?