The Pnb fraud is neither the first in the history of the banks in India, nor is it the last. It is just one of many – in fact one of a very small minority which came out because of its enormity. If it was a Rs. 110 crore fraud, PNB may have just pushed it under the carpet and called it an NPA.

Let us see what are the typical things needed for a fraud.

Once upon a time the cashier of a company (need not have been a bank) would take money from the company’s cash box on a Saturday evening, use it in the races on Sunday and put it back on Monday morning. So a typical audit on a Sat or Monday would not have been possible to spot this illegal activity. How does one avoid this? Simple by making sure that the cashier does not have the cash box key on Saturday at the end of the day’s activity. Or make sure that the cash box key is a joint responsibility so that 2 people will have to do it together. Maker. Checker.

In a typical psu bank fraud the following conditions have been used very well:

  • manual record keeping
  • long gaps between reporting time
  • maker, checker, auditor responsibility not implemented- at all or not well.
  • manual transactions, and refusal to use technology
  • slack and sleeping auditors
  • slack and sleeping regulator
  • slack and sleeping employees PERHAPS protected by unions
  • employees have no skin in the game
  • Central banking is just a fraud

Let us come to each one of these problems:

  1. Manual record keeping is not all that bad. Till a few decades ago all records were manual, but the ‘Agent’ (bank managers used to be called agent) would not go home till the cash was tallied! EVERY DAY. So at branch level if there was a mistake in casting, posting, or totaling, or in inter branch reconciliation, the staff would sort it out before they went home. Today manual record keeping (like SWIFT) is done by one man, and he has the guts to give away his login and password to the staff of the client WITHOUT any worry. In a foreign bank where I have audited, giving the password to a colleague was considered bad enough for dismissal. Period. Thou shall not share your password. Shetty had given his pw to the staff of Choksi and Modi. In a manual recording there is laziness which makes people postpone posting – and a back log does not tell you how big the problem is. A manager, director, or auditor who turns a blind eye to non posted or non reconciled transactions should be sacked, of course.
  2. If an employee is not posting regularly, and or or not reconciling regularly and his boss does not know (or is not concerned), both boss, supervisor, and the officer have to be sacked. Asap. Delay in reporting and delay in reconciling are amazingly stupid.
  3. Maker, checker, auditor roles merging or not even defined is a crime. All of them in that line of command should be hung from the nearest tree or even better hands tied and fed to the rats or red ants.
  4. If the record keeping is manual, records are not posted on time, and there is refusal to use technology, the EXISTING system has to be far more regularly audited. The way the auditors are appointed, the way they work, and the way the whole system scratches each other’s bank is shocking. Especially if you are not a professional in practice or in banking, you will be shocked.
  5. In the absence of the employee having a skin in the game, with no punishment (ask those bankers who were accused in the earlier scams its not really true, but that is the perception), why should a banker be honest. Is he willing to treat honesty as an end in itself? No.
  6. Bankers do not have adequate training in newer frauds.
  7. Central banking is nothing short of fraud. Banks lend money that they create.
  8. Central banks commit real big frauds by helping banks hide. No central banking employee has so far offered his resignation in the PNB faud.

I am still to understand how the PNB fraud happened. However having done bank audits, I am not surprised at all.

Running a SWIFT operations without it being integrated into the main banking accounts is like running a bank within the bank and that second bank having no reporting liabilities.

In short, its a fraud.

Is PNB a share worth buying? In my mind no.

No because I do not trust the Profit and Loss account, the summary of clients, and the UNRECONCILED accounts.

I will give psus a bye.

  1. India should allow class action suites. Then only all responsible parties will face heat.
    All these frauds taking place and CMD takes no responsibility.
    His answer was if required we will consider forensic audit.
    This is clear failure of checks and balances at all levels.
    Infact common man is loosing his money not just share holders since Govt is going to infuse more capital in PSUs that means Govt money / common man’s money need to be invested because some people forgot to their job.
    Thats why not only employees of that branch but the higher ups / auditors need to face the heat as well.

  2. We are seeing the ‘effect’ part of karma. The ‘root-cause’ has happened in the past and has been hidden for so long. Past Govt must be held responsible for creating this kind of mess. PSU (Govt controlled) banks are like ‘rotting fish’ where the head rots first.

  3. If the govt uses PSBs to quash farmer loans and provide loans to their relatives, there is nothing wrong in it.
    But if a private citizen like Nirav Modi uses the same bank for his own benefit, its wrong is it?
    This is hypocrisy at its worst.
    Farmers please understand you have also not paid back to these banks at some point in the past.
    Do not jump up and down now.

  4. Having worked in a PSU Bank in forex dept,both before core banking & after I understand the SWIFT well. But from the last few years all the swifts were routed through the specific bill through CBS.I wonder how the miscreants have managed the fraud.It would be interesting to know the nitty gritty details, though it is very sad and shameful.

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