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.
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