Why Rs 11,300-crore PNB fraud is a sign of how the rot in Indian banking has spread
The mega fraud of Rs 11,360-crore ($1.77 billion) - allegedly committed by Mumbai-based diamond merchant Nirav Modi at a Mumbai branch of Punjab National Bank (PNB) - is already being billed as India's biggest bank fraud. But wait, it's not only a bank fraud since it would inevitably be not limited to the PNB alone. This developing story (read cesspool) is also bound to suck in other trades and industries, including the murky dealings of the global diamond trade of which India is only a tiny part.
The PNB-Nirav Modi fraud is just the tip of the iceberg. It will be fallacious to see it only as a malaise in the Indian banking system which of course still hasn't learnt its lessons from the Harshad Mehta scam of a quarter century ago.
Of course, the latest case points to the incontrovertible fact that the Indian banking industry still continues to be a leaking bucket. The lid has been pulled off the PNB fraud even as the Vijay Mallya case is still fresh in public memory.
In a country like India, where 83 per cent bank frauds, scams and irregularities are perpetrated on public sector banks, it's a pity that governments after governments have done precious little in insulating these banks and the taxpayers' money from systematic loot and plunder from law breakers who are always ahead of law enforcers.
And yes, today's scamsters have learnt a lesson from Harshad Mehta - they flee the country before their crime gets uncovered. Harshad Mehta, being the pioneer of his typical brand of scam, wasn't foresighted enough and had remained in the country. But the Vijay Mallyas and the Nirav Modis have perfected this art. Mallya is well-ensconced in the UK, while Nirav Modi is said to be cooling his heels in Switzerland.
A case in point is that the defrauded amount of Rs 11,360 crore has been reported from just one branch of PNB. This means that there is a strong possibility of more PNB branches as well as other banks too reporting similar swindling in near future. The Union finance ministry has already asked all banks to send reports involving this case or other such incidents latest by the end of this week which means that more skeletons are going to tumble out of the cupboard.
More importantly, skeletons are going to tumble out of the diamond industry's cupboard too. The government will do well to put a laser beam focus on the diamond trade industry as well.
Veteran economic journalist TN Ashok told me that the PNB fraud is a fit case for cleaning the proverbial Augean stable called the diamond industry and talked of the phenomenon called “round-tripping”, which means that instead of being taxed on profit, like most other industries, the Indian diamond industry was taxed on turnover, like the diamond trade in Israel. The export figures were grossly inflated and the money thus generated was ploughed into other sectors, including the real estate, and not just diamond trade.
Diamond trade and the phenomenon of round-tripping
The UPA 2 government had tried to tackle this irregularity that plagued the diamond industry in a bigger way then. TN Ashok explained that at the end of fiscal year 2011, India’s gross polished diamond export was $28.22 billion, whereas the value of diamonds sold by retailers worldwide in 2010 was “only” $18.2 billion.
The UPA 2 government, in order to check this trend, introduced a 2 per cent subvention scheme by which import of polished diamonds attracted a duty. Soon after its introduction, it led to a marked decline not in exports but in export value - falling from $20 billion to $5.8 billion. Actual exports had not declined, but the inflated value of exports had come down, Ashok explained.
This establishes a clear link between round-tripping and bank financing, and the money thus generated widened the already complicated web further as it was diverted to other sources, not for betterment of diamond trade, but into speculative land deals in the realty sector and buying of rough diamonds from unofficial sources.
All these irregularities too will have to be probed by the Modi government and loopholes will have to be plugged.
Last but not the least, the PNB fraud case, though simmering for the past five years, has come as a bolt from the blue for the Modi government. The Opposition, particularly the Congress, will use this political windfall for attacking the Modi government.
The man on the street doesn't understand the nitty gritty of a scam, who did it and when. He only remembers that a big scam had broken out when such and such government was in place. The 2G scam is a case in point. In cases like these the public perception matters the most. In this respect, the Modi government will be at the receiving end.