PNB scam: Did UPA cook up 80:20 scheme to aid the Choksis and Nirav Modis; is Raghuram Rajan guilty of ignoring early warning?

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An exclusive media report about former Reserve Bank of India (RBI) governor Raghuram Rajan and an impending problem in the gold industry throws interesting questions on the role of the UPA government and the approach of the regulator to the issue in the backdrop of the Rs 12,700 crore Punjab National Bank (PNB) fraud case.

The report in Moneycontrol mentions a letter written by the India Bullion and Jewellers Association (IBJA) on 26 July, 2014. The industry lobby accused the then Congress-led UPA government of ‘deliberately yielding to the cronies’ by changing the gold policy days before the government was demitting office, the report says. The accusation was primarily based on a decision taken by the government ‘on May 21, 2014, five days before the UPA government officially demitted office, allowed 13 ‘star trading houses (STH)’ and ‘premier trading houses (PTH)’ including Choksi-led Gitanjali Gems to import gold and sell about 80 percent of their total bullion shipment in local markets under the so-called 80:20 scheme.’

To begin with, one cannot draw a direct correlation between the 80:20 gold scheme to the PNB scam. The scheme was basically about letting certain traders import gold under the condition that 20 percent of the import will be exported while the rest would be used for domestic business. Under this, some of the trading houses would have certainly benefitted since they were able to hoard gold using this leeway. But, the PNB scam was not about hoarding of gold but outright fraud conducted by diamantaire Nirav Modi in collusion with certain bankers forging Letter of Undertaking (LoU) from the bank for a good seven years. The scheme was scrapped in November 2014 and all restrictions were lifted. But, in the context of the scam involving Modi and his uncle Mehul Choksi, founder of Gitanjali Gems, a closer re-look at how the scheme benefited select trading houses including Gitanjali is called for. Particularly after a Parliament panel to probe deep into the 80:20 scheme last week.

By now, it is quite well understood that the 80:20 scheme benefited Choksi. Only thing remaining to be seen is to what extent the scheme was misused to defraud bank money and were there any political kickbacks involved. Only a thorough investigation will reveal the details. What is curious to know is whether the RBI, as the regulator, took cognizance of the warning signals issued by the industry lobby?

As the Moneycontrol report points out, IBJA said that the RBI circular on 21 May, 2014 had “sidestepped nationalised banks, which have been the backbone support of our bullion importing and jewellery exporting members by allowing certain private sector export houses to import gold up to two tonnes at one time, even for those who are not in the business of bullion and gold jewellery”, besides asking Rajan to “make a prudent appraisal” of the decision and “check the loopholes before it was too late.” It is not clear whether Rajan acted on the caution.

In the context of the recent bank frauds, it is quite clear that the RBI clearly failed in its duty to ensure that checks and balances in the banking sector worked to avoid foul play. Former RBI deputy governor and PNB chairman K C Chakrabarty went to the extent to say that Indian banks have no risk management capacity to Firstpost earlier.

Repeated frauds and governance flaws in banking institutions it regulates raises questions on RBI’s ability to ensure risks management tools are operational at the bank-level. Remember, there are representatives of the central bank in the boards of large banks including PNB, who failed to monitor and identify a fraud of this magnitude for several years. This is despite having all the checks in place. The SWIFT software, purportedly used to conduct the PNB fraud, was subjected to multiple checks and audits but none worked to dig out the dirt. There can’t be any excuses from the part of the regulator for such a serious lapse. In the backdrop of the fresh questions on the PNB scam–the role of UPA’s 80:20 scheme and the report of early warning to Rajan—the central bank owes an answer on charges of oversight.

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