Banks, Broke and Broken are becoming synonymous words! Another scheme for scam in another bank is in the news. A fraud of ₹11,500 crore in Punjab National Bank (PNB) has accidentally come to light. PNB is the second largest bank after State Bank of India. The Union Finance Minister of India, earlier in this year, announced infusion of ₹1 lakh crore into 21 public sector banks in order to ease out their capital stress and PNB is to get ₹5,473 crore out of that. So, the quantum of scam is more than twice the capital the bank is scheduled to get from the government. In other words, the bank may become financially more vulnerable than earlier. The internal, external and statutory checks, controls and audits of banks done by its own audit committees, by the central bank (RBI) and by a firm of Chartered Accountants are supposed to ensure safety of banking system. But, as reported, the scheme of fraud was being perpetuated for the last seven years and it all went scot free.
THE BACKGROUND
The reported fraud is with regard to cross-border, rather international, transactions where funds are released by a bank sitting in a foreign land based on a guarantee from an inland bank issued as Letter of Undertakings (LoUs) and communicated through a system called SWIFT (Society for Worldwide Interbank Financial Telecommunications). This is an encrypted system and it is understood that this ensures security. This system started in 1973 by Brussels based bankers is trusted by more than ten thousand financial institutions throughout the world and has replaced the older system known as TELEX. This paper-less method was prepared to replace any need of hard copies and physical movement of documents. The myth of it being fool-proof was broken earlier too. For example, in February 2016, Bangladesh’s central bank lost $81 million after its system was hacked and orders were sent out to make payments via SWIFT. The latest breach is reported in our land. The reported fraud also involved issuance of LoUs without proper security deposit or approved credit limit.
THE OVERVIEW
This is a systemic failure case. Apart from the case of wilful misuse of the banking system for self-pecuniary gains a question mark exists on the feasibility of the banking system. Banks are not getting back their amount from their debtors as these assets are becoming non-performing at a fast pace. This is happening in either of the case: be it fraud or failure of the debtors or inefficiency, incompetence or connivance of the creditor, the bank. Banks do not have their own money. This is initially provided by depositors and later the banks provide loans more than the amount they have collected. The credit so created by the banks is in fact provided out of thin air based on the faith the banks muster. Once this faith shattered the system would crumble. Ultimately the cost is to be borne by the common man either in the name of bail in or bail out.