The $1.8 billion bank fraud unveiled at a single branch in Mumbai of Punjab National Bank (PNB), one of India’s largest state-owned lenders, has rattled the country’s banking sector.
The man accused of being at the centre of the scam is Nirav Modi (no relation to Prime Minister Narendra Modi), a soft-spoken Mumbai jeweller and diamond merchant whose pieces have been worn by Hollywood stars and India's elite.
Allegedly, certain employees issued letters of undertaking, a form of guarantee, to other banks so that companies linked to Mr Modi could take out loans – which were essentially unsecured – from overseas branches.
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Several arrests have been made, including of PNB employees, in connection with the scam. Mr Modi is understood to be outside of the country.
This comes as India's banks – and state run lenders in particular – are already struggling under the heavy burden of ballooning bad debt, amounting to almost $150bn, according to unpublished Reserve Bank of India data reported by Reuters. Share prices in India's banking sector have taken a hit following the scandal.
While an investigation is under way, the extent of the loss remains unknown. Banks and regulators have raced full throttle to review procedures they have in place to prevent and detect such scams.
"Is this the tip of the iceberg?" asks Ramesh Bhojwani, a Mumbai independent equities analyst and investor. "Are there more skeletons in the cupboard? This is something that's being looked at at all the public sector banks and all the private sector banks." In the wake of the PNB case, India's Central Bureau of Investigation is investigating the owner of Indian pen company Rotomac, Vikram Kothari, after a complaint from another state run lender, Bank of Baroda. He is accused of defaulting on loans totalling more than 36bn rupees (Dh2.04bn) from a consortium of several Indian banks.
The scandal shows "there's a deep malaise", says N Chandramouli, the chief executive of TRA, a Mumbai brand and research consultancy. "And unless you take care of systems, processes, technology, you will probably see more of this. So you need to have both action which is reprimanding and correcting this particular issue. The entire process of banking and loans, easy loans or wrong types of loans, should be definitely corrected."
Any scams can result in investors and the public losing confidence, which can ultimately hit banking flows given that the “entire banking system is based on trust”, he says.
The government and banks should take action, because if “you lose trust, everything can go down”.
The fraud case has become a political issue, with the ruling and opposition parties both throwing accusations at each other for being responsible for a scam of this magnitude being possible.
The government has said that anyone found guilty of trying to defraud the banking system would be punished, regardless of their position in society.
Finance Minister Arun Jaitley, speaking at a conference, criticised auditors for their failure to detect the scam and said that "supervisory agencies", without directly naming the Reserve Bank of India, need to look at putting systems in place to deal with irregularities.
In a statement, the RBI maintained it had warned banks in 2016 of potential fraud related to the SWIFT infrastructure.
The regulator said it had ordered banks to strengthen all mechanisms related to the transfer system.
The central bank is also setting up an expert committee to investigate what it describes as “the rising incidence of fraud in the Indian banking system”.
India is not the only country that has been hit by rogue bank employees or criminals targeting the SWIFT payments system.
In 2016, hackers made away with $81 million after attacking Bangladesh’s central bank before the New York Federal Reserve was alerted, preventing a potential $1bn heist.
In a letter that has been widely published in the Indian press, Mr Modi hit back at PNB, saying the liabilities are less than half the amount specified by the lender.
In his letter addressed to the bank, he said because the bank went public with the matter, properties and stores have been raided.
The frenzy around the scandal has “destroyed my brand and the business and have now restricted your ability to recover all the dues leaving a trail of unpaid debts,” he wrote.
Bollywood actress Priyanka Chopra, who was a brand ambassador for Mr Modi's designer jewellery line, ended her contract with the brand, according to the Press Trust of India.
There have been job losses at Mr Modi's firms, as well as concerns the scandal could have knock-on effect on the broader multibillion-dollar gems and jewellery sector in India.
“Bank finance to the trade is already guided by stringent norms of the RBI and government of India with detailed internal audits in place on a quarterly and annual basis,” according to a statement from India’s Gem and Jewellery Export Promotion Council.
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“This only demonstrates lacunae in [the] internal control system and failure or lack of fraud protection measures within the public sector bank.”
Other accusations that the bank was at fault have also been levelled.
In a filing to the Bombay Stock Exchange, PNB said it had "enough assets [and] capital to meet any liability which is decided as per law".
But the extent of the financial fallout still remains to be seen. Some reports indicate the amount siphoned off from PNB may be as high as $3bn.
“Public sector banks continue to grapple with weak systems, raising questions of why the processes are not centralised, unlike most private banks, where bypassing core banking solutions is not easy,” says Kunal Shah, an analyst at Edelweiss, a financial services firm based in Mumbai.
“At this juncture, investigating agencies have been roped in and it will take some time to ascertain the financial impact on the banking system.”
Banks are already understood to be moving to tighten up systems.
“Most of these banks will ensure that their internal controls are up to the mark now if they are not already,” says Vikram Pandya, the director of FinTech at SP Jain School of Global Management.
“At the end of the day the long-term outcome of this thing will be that you will have more robust systems, you will have more technology in place so banks are able to identify red flags very clearly and you will find more and more involvement of RBI in terms of prevention-based audits.”
How the Indian government handles this issue will “define its mettle”, he says. What will be critical in the minds of the public is that anyone found guilty in the banking fraud is brought to justice.
“If you are able to put whoever who has done this to justice, you are ensuring there is trust in the legal system as well as the banking system,” says Mr Pandya.
“Fraud can happen, but at the end of the day there has to be justice."
