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Anatomy Of A Scam: Should PNB Really Surprise Us?

Good judgement comes from experience, but experience comes from bad judgement. We have enough experience in scams

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At the peak of the Satyam scam in 2009 I had written an article titled " More  Satyams will continue to happen". Sadly, since then the scams just got bigger, bolder  and more audacious : 2G, Coal allocation, CWG, Chopper and now PNB.  I am frankly not surprised : it is not only age and experience which shapes this opinion but a hard look at the core issues underlying the scam not yet publicly dissected.

First, the metamorphosis of our national character over the last forty years needs to be confronted. Unfortunately the bitter truth is that my generation - the one succeeding the independence movement - has failed the nation. Corruption - or the willingness to "play the system" in any form - has become a national obsession. Even those who are not blatantly corrupt find no moral hazards with taking short cuts, bending the intent of the established policy  or doing simple "jugaad" - which passes off, and is actually appreciated and rewarded, as our brand of "innovation" by the powers that be in the given context. Such is our frightening  descent into this moral morass that this line of thinking has pervaded into most levels of society -from large businesses, government, institutions  on one hand to grassroot organisations like local bodies and residential welfare associations.

In this socio-psychological set up it is extremely unlikely that checks and balances will be effective, as the cornerstone of even the most well conceived internal control systems is based on the premise that not all are dishonest ;  and hence making collusion  difficult  to engineer. In PNB's case, the sheer extent of the  many unanswered questions  indicates a wider collusion. After all, how difficult is it to find 5-10 people in key operating positions to collude in our system ?

Secondly, the reluctance in aggressively using  technology to counter human intervention related risks in the control environment is perplexing. PSU banks spend approximately 1%-3% of revenue on technology  Vs.  6%-9% for global banks like Citi and JPMC.  Technological  advances in fraud detection now make it possible to contain such risks given the will to do so. Four  particularly relevant areas are biometrics, artificial intelligence, data analytics and blockchain. Blockchain, for example, is a transformative computing architecture for financial services which provides the ability to take information from fragmented networks  and use  distributed ledger technology  to create a single view of the transaction. A Nirav Modi type of operation of using one LC across various banks ( called double spend frauds in international banking parlance )  could be totally eliminated. This is merely one instance where fragmented, manual processes and different standalone, operating  modules supported by multiple vendors  expose banks to fraudulent activity.

PSU Banks, though, are fundamentally  bound by the lowest cost vendor approach, also termed reverse auction pricing. By definition this eliminates internationally acclaimed vendors with the latest technology like Temenos , Misys, etc., from qualifying as core banking software vendors. Creating these products require massive, sustained R&D investments running into millions of dollars. Even Intellect Design Arena  - the only listed, Indian banking software product company with a complete suite of products - competes globally to recover the  significant investments made over the last 15 years funded entirely by its visionary shareholders. It is tragic that we are unable to use such companies for the benefit of our banks due to this archaic regulation.  Interestingly, Intellect Design has successfully implemented  a comprehensive Central  Core Banking solution -designed exclusively for Central Banks - for the Reserve Bank of India with a unique technology architecture which supports real time enterprise general ledger and 12 other control and management modules, thereby eliminating the need for reconciliations totally. It has replaced  14 applications, 7 separate databases , 7 vendors, integrates  1100 clearing houses, 4400 currency chests involving over 14000 staff and monitors  risk analytics  over 50+ dimensions on a real time basis . The impact of this software on risk reduction due to disaggregated systems is massive (more than 95% ) apart from significant cost reduction and providing  real  time information to Parliament.

Being a project of national importance Intellect Design took the decision to substantially compromise on pricing to deliver the solution to RBI…..but is this a sustainable proposition ? I do not know of many promoters who would do this. If PNB had such an integrated solution it is highly unlikely that a fraud of this magnitude would have been even conceivable, let alone executed and undetected, over years. The Government must now demonstrate its firm commitment to unshackle the PSU Banks from this restrictive reverse auction policy and  allow involvement of vendors with the latest technology  offerings to battle fraud on a systemic basis.

Thirdly, the political will to cleanse the system has been totally absent in the past, and  time will prove if it is different this time. Contrast this with the US where, at the turn of the century, accounting scandals rocked the entire system : Enron, W Com, Tyco, AIG. Decisive steps were taken swiftly to introduce multiple legislations and criminal prosecutions leading to Arthur Andersen surrendering its license, life terms for the high and mighty of corporate America for upto 25 years and massive fines in billions. No accounting fraud of such magnitude has since come to light . Fundamentally, the fear of the law and an effective justice delivery system is paramount in containing the psyche of human greed.

This is a golden opportunity for PM Modi to walk the talk on his favorite dictum : "maximum governance, minimum government". Whilst  ownership structure per se is not the panacea to this issue, governance is.  He must show the political will to usher in governance reforms for the PSU banks and allow their genuine transformation to purely  commercial banks with a defined role, purpose and business strategy with  each bank having  specialisation by industry vertical/ region. This will allow large scale reengineering of banking systems including the creation of a secondary market for NPAs, progressive HR policies and a culture of accountability.

To paraphrase Mark Twain : good judgement comes from experience, but experience comes from bad judgement. We have enough experience in scams. India now has a determined leadership  : it just needs to act decisively . Else more PNB's will continue to happen.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Prabal Basu Roy

The author is a Sloan fellow of the London Business School and a chartered accountant. He has previously been a director/ Group CFO in various companies. He now manages a PE fund and advises startups / corporates.

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