Page 21 - Bloomberg Businessweek July 2018

Bloomberg Businessweek
THE HEIST ISSUE

be transferred to Pune,” Prabhu says. “I’d ask him: ‘Stay connected to politicians or bank directors, with loans too
here a while. Why are you in such a hurry?’ ” Kharat liberally advanced and too lethargically pursued. “If you
couldn’t have known about the convolutions of the pur- line up a list of the top 20 defaulters, they’re all seen to
ported scam, Prabhu adds. “His work was like data-entry be politically very powerful,” he says. That’s partly why
work. He would have had to type in so many entries, day stressed assets, which include nonperforming assets and
in and day out,” he says. “It wouldn’t have been easy for restructured loans, make up 16.2 percent of state banks’
anyone to tell which were fraudulent and which weren’t. loans; the figure for privately owned banks is 4.7 percent.
And Kharat—I can vouch for him. He wouldn’t even rec- Modi does have powerful friends—he appeared in an offi-
ognize what a letter of undertaking is.” cial group photo with Indian Prime Minister Narendra
Prabhu was less familiar with Shetty, a clean-shaven Modi (no relation) at the World Economic Forum in
man with graying temples. “He wasn’t the type who’d sit Davos in January—but there’s been no suggestion that
and chat with you,” Prabhu says. “He wouldn’t converse political influence helped him and Choksi obtain letters
at all.” In May the CBI said Shetty had “obtained illegal of undertaking.
gratification”—bribes, in other words—from Modi’s and The notion that they could have pulled off such a swin-
Choksi’s companies in return for his assistance. Press dle with the collusion of just two bank employees was
reports claimed Shetty had confessed to the CBI after his abandoned in mid-May, when the CBI filed charge sheets,
arrest, but his lawyer issued a statement denying that he running into thousands of pages, against Modi, Choksi,
was guilty. Kharat’s lawyer said in a statement that his and several past and present PNB employees. The high-
client had only typed out such letters “under pressure est official to be named was Usha Ananthasubramanian,
from Gokulnath Shetty. He has no role in the case.” Bhat’s the bank’s chief executive officer from 2015 to 2017.
attorney said his client was only a signatory and didn’t Ananthasubramanian and other executives were accused
understand the terms of the documents. of failing to implement a 2016 order from India’s central
A former PNB executive, speaking on condition of ano- bank to seal the gap between PNB’s Swift platform and
nymity, says there was little reason to believe Shetty and its main database. Further, the CBI alleged, these officials
Kharat were the only two employees involved. “There is had misled the central bank, assuring it these systems 59
a concurrent auditor sitting there all day, for instance. were secure. (In a text message, Ananthasubramanian
He’s supposed to validate the daily transactions. It isn’t denied she was guilty.)
as if he slipped up on one day, or two days. This went on The charge sheets are merely precursors to a trial,
for years. How did that happen?” The funds moving in but the wheels of the judiciary in India grind with exas-
and out of PNB’s nostro account overseas should, simi- perating sloth. Lalit Modi, another tycoon (again, no
larly, have triggered an alarm when they failed to match relation to Nirav) who nipped out of the country just as
up with the actual sums the bank had approved. law enforcement agencies began cracking their fingers,
It’s also possible that Modi’s credit lines simply reached London in 2010; the government has yet to sub-
drowned within PNB’s oceanic volume of business; by 2017 mit an extradition request to bring him home for trial.
its total assets stood at $106 billion. “At the corporate level, If Nirav Modi ever makes it back to India, he’ll face
these transactions aren’t noticeable,” the former executive multiple charges, including conspiring to defraud PNB
says. “But the branch manager should have noticed.” The and money laundering—accusations his lawyer called
governance of India’s state-run banks needs to improve, “half-baked” in a statement released in May. In a way, the
the former executive acknowledges. Political nudges and fraud has cost the state-run banking system not only PNB’s
corrupt officials are familiar itches in the banking body, so immediate $2 billion but also future funds. At least two
a loose system of accountability is an invitation to fraud. banks have deferred their plans to raise fresh capital in
Harsh Vardhan, the head of Bain & Co.’s financial- the first half of this year. “There has been a real shaking
services practice in India and a trenchant critic of how of investors’ faith in governance, and that faith was never
state banks are run, says he was stunned when news of strong to begin with,” Vardhan says. “That’s where the
the PNB fraud emerged. “I couldn’t understand how this real damage has been.” The banks can try to convince
could have happened. This was all Risk Management 101.” their shareholders and investors—and perhaps even them-
State-run banks undergo multiple audits, he says, “all of selves—that the scam was an anomaly, an aberration, the
which seem to have been compromised.” product of a stray loophole that someone had hoovered
Cronyism and corruption are endemic to the system, money through. Only, there’s nothing as yet to indicate
Vardhan adds. Standards change when the borrowers are that this is the truth. <BW>

July 2, 2018