Retrofit: PNB-Nirav scam - Will we learn the right lessons?

My head is spinning with an onslaught of the alphabet soup. Truth, it is said, has a mind of its own, and it always manages to emerge from the cracks, and be heard. More than that, its echoes are inherent in the questions that people ask and they always reverberate loudly. The Punjab National Bank-Nirav Modi-Mehul Choksi scam and the Rotomac Global swindle has, once again, thrown into stark relief the quantum surge in the threat analysis to India’s ever-porous banking system, always ripe for a fall — government fetters leaving in their wake more questions than answers. Are you familiar with the Cosa Nostra or La Cosa Nostra, the dreaded Sicilian criminal syndicate, which later shifted its activities to the United States? Lucky Luciano became the most powerful and first undisputed mafia boss in the US, who used his position to run La Cosa Nostra like a major corporation. He set up the “commission”, which included bosses from seven families, to rule all La Cosa Nostra activities.  But that is now past, for, raised on Mario Puzo’s Godfather and having watched the tripler based on his epic innumerable times, today I am faced with a new reality: Nostro. This refers to an account a bank holds in a foreign currency in another bank. When a bank needs to make a payment in a country where it doesn’t hold a Nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf. 

But that’s not all, there is a Vostro account as well. A Vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking, where the bank holding the funds acts as  custodian for or manages  the account of a foreign  counterpart. To get into the granularity of this —   the Vostro account is held in the currency of the country where money is on deposit. A Nostro account is the record of the bank whose money is at another bank. Nostro accounts are often used to simplify trade and foreign exchange transactions. Confusion confounded? Yes, I know the feeling. All this brings me to the cult song Spinning Wheel, by Blood, Sweat and Tears 1968: What goes up must come down/ Spinnin’ wheel got to go ’round/ Talkin’ ’bout your troubles it’s a cryin’ sin/ Ride a painted pony let the spinnin’ wheel spin/ You got no money and you got no home/ Spinnin’ wheel all alone/  Talkin’ ’bout your troubles and you, you never learn/ Ride a painted pony let the spinnin’ wheel turn/ Did you find the directing sign on the/ Straight and narrow highway/ Would you mind a reflecting sign/ Just let it shine within your mind/ And show you the colors that are real/ Someone is waiting just for you/ Spinnin’ wheel... But this is not the end of it, for there is virtual barrage of acronyms being thrown at me — LoU, FB, NFB and a zillion more which directed me towards investopedia, a website that focuses on investing education and financial news. FB is not Facebook, it is “fund based”, while NFB is “non-fund based”. 

Then there is CBS, no, not the American telly network famous for its iconic 60 Minutes show, but “core banking software” and SWIFT, again not the bestselling Maruti Suzuki hatchback which has recently been given a facelift.  The SWIFT code is an international bank code that identifies particular banks worldwide. It’s also known as a Bank Identifier Code (BIC). Finally, there is FLC, or “foreign letter of credit”, and an AD, or “authorised dealer”. The one thing common in the Nirav Modi/Mehul Choksi swindles is LC — letter of credit. Many years ago, at the height of the Ketan Parekh scam, at a news meeting of a very large national daily, I had a tough time explaining P Notes and their devious utility in stock market transactions — the general sense being how was a promissory note involved in the equity market, till I explained that a P Note was not a promissory note but a Participatory Note, which helps mask the identity of the actual investor as he uses the sub-account of an FII to invest in capital markets. Today, almost 17 years later, we have come to know of it as Promoter’s Note and Politician’s Note, which is an instrument to round trip and bring back overseas black stash into domestic markets.

There is learning from every scam, but never in the past have there been so many abbreviations to deal with. Ironically, PNB, India’s second largest public sector bank, has a history of fraud with jewellers and diamond merchants just as the erstwhile private bank, Global Trust Bank, which folded up due to overexposure to diamantaires and was swallowed by the Oriental Bank of Commerce.  The wilful defaulters’ list of PNB reveals that it has an outstanding exposure of Rs 266 crores to MBS Jewellers, Rs 69 crores to C Mahendra Exports, Rs 45 crores to Gem Star Company, Rs 35 crores to KBM Gems & Jewellers, Rs 30 crores to Ghansham Das Gem & Jewels, Rs 29 crores to Future Jewels and Rs 17 crores to Jai Mata Jewellery. Someone in the bank obviously loves gem and jewellery makers. As on March 31, 2017, the total fund-based exposure to the gems and jewellery sector was Rs 2,360 crores.  Its non-fund based exposure to the same sector was another Rs 430 crores. PNB also had exposure in two other massive fiddles — Winsome Diamonds and Shree Ganesh Jewellers. It chose not to learn from these fiascos. Public money recapitalised by the government for public sector banks comes with the sovereign guarantee of the Central government. A  forensic audit conducted by Ernst and Young after some of these aberrations came to  light proved conclusively that not only were there major lacunae in the system, rogue employees were constantly compromised and involved in trickery, deception and  defalcation.