Lessons from a ‘Scam’

The Punjab National Bank (PNB) “scam” is the latest addition to the list of scams, real and imagined, that have rocked India in recent years. In the case of PNB, two things should be highlighted upfront. One, it is clear that a bank fraud was perpetrated. A bank fraud is a situation in which employees or outsiders subvert rules and regulations at the expense of the bank. This is different from a situation where the bank itself violates rules and regulations in order to benefit shareholders and managers at the expense of customers or taxpayers. Non-performing assets (NPAs) may involve a fraud (with bank employees colluding with a borrower) or they may simply arise from a bona fide business decision that has gone wrong.

Two, at this point it appears that the fraud relates entirely to what is called operational risk, that is, subversion of systems and processes. It does not relate to credit or loan risk. The distinction is important given that the losses have quickly acquired enormous political overtones. The opposition has been quick to point an accusing finger at the National Democratic Alliance government. The Bharatiya Janata Party, in turn, has responded by alleging links between the accused, Nirav Modi, and members of the Congress party.