Cut & Thrust: Banking’s alphabet soup

My head these last few days is spinning with the onslaught of the alphabet soup. Truth, it is said, has a mind of its own and it always manages to emerge from the cracks and be heard. More than that its echoes are inherent in the questions that people ask and they always reverberate loudly. The PNB-Modi/Choksi scam and the Rotomac Global swindle have once again thrown into stark relief the quantum surge in the threat analysis to India’s ever porous banking system, always ripe for a fall. Gover­nment fetters leaving in their wake more questions than answers. Fiddles, diddles and swindles by subverting

the banking system are, of course, commonplace in India; rogue stock brokers Harshad Mehta and Ketan Parekh both used banking channels to break the banks.

Familiar with the Cosa Nostra or La Cosa Nostra all these years, the dreaded Sicilian criminal syndicate or Mafia which then shifted its activities to the United States. With Lucky Luciano becoming the most powerful and first undisputed Mafia boss in America who used his position to run La Cosa Nos­tra like a major corporation, he set up the “Commission” to rule all La Cosa Nostra activities. The Commission included bosses from seven families and divided the different rackets among the families. But that is now in the past for raised on Mario Puzo’s ‘Godfather’ and having watched the tripler based on his epic innumerable times, now years later, I am faced with a new reality - Nostro.


Before I can say my own name, on checking it appears Nostro refers to a bank account held by, say, an Indian bank with a foreign bank, usually in the currency of that country. Further, when a bank needs to make a payment in a country where it does not hold a Nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf. That is not all. Apparently to confuse the issue some more and make it spicy like a Jambalaya, there is a Vostro account as well. While I am it, let me give you the lowdown on Vostro - A Vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart. To get into the granularity of this –  the Vostro account is held in the currency of the country where money is on deposit. A Nostro account is the record of the bank whose money is at another bank. Nostro accounts are often used to simplify trade and foreign exchange transactions. Confusion confounded, yes I know the feeling.

Which brings me to the cult song - Spinning Wheel - by Blood, Sweat and Tears 1968:

What goes up must come down

Spinnin' wheel got to go 'round

Talkin' 'bout your troubles it's a cryin' sin

Ride a painted pony let the spinnin' wheel spin

You got no money and you got no home

Spinnin' wheel all alone

Talkin' 'bout your troubles and you, you never learn

Ride a painted pony let the spinnin' wheel turn

Did you find the directing sign on the

Straight and narrow highway

Would you mind a reflecting sign

Just let it shine within your mind

And show you the colors that are real

Someone is waiting just for you

Spinnin' wheel,…

Get the picture, this is the trailer, now we come to the main feature. That is not the end of it for there is virtual barrage of acronyms being thrown at me - LoU, FB, NFB and a zillion more which have sent me scurrying for cover and looking up investopedia. Na, FB is not Facebook, it is fund based while NFB is non fund based. Dejargonising all this meant checking up on all this alphabet soup. Then there is CBS, no, not the American telly network famous for its iconic show ‘60 minutes’ but core banking software and SWIFT – again not the best selling Maruti Suzuki hatchback which has recently been given a face lift but SWIFT code is an international bank code that identifies particular banks worldwide. It's also known as a Bank Identifier Code (BIC). Finally, there is FLC or foreign letter of credit and an AD or authorised dealer and not AD as in BC and AD again not Before Christ and Anno Domini. The one thing common in the Nirav Modi/Mehul Choksi swindles is LC - letter of credit. That is the one financial acronym most people are familiar with.

OMG let me get off this crazy carousel. Many years ago at the height of the Ketan Parekh scam in a news meeting of a very large national daily, I had a tough time explaining what P Notes and their devious utility in stock market transactions was. The general sense being how was a Promissory Note involved in the equity market, till I explained what a P Note was - Participatory Note - which helps mask the identity of the actual investor as he uses the sub account of a FII to invest in capital markets. Of course, over time, now almost 17 years later, we have come to know of it as Promoter's Note and Politician's Note, a means and an instrumentality to round trip and bring back overseas black stash into domestic markets. There are learnings from every scam, but never in the past have there been so many abbreviations to deal with. Nor have the learnings been transposed, for scams continue uninterrupted.

History of fraud

Ironically, PNB has a history of fraud with jewellers and diamond merchants just as the erstwhile private bank, Global Trust Bank, which folded up due to over exposure to diamantaires and was swallowed by Oriental Bank of Commerce. You would think PNB is a rogue bank, given its history sheet, for in the last five years, there have been repeated frauds involving jewellers. In the wilful defaulters list submitted by various banks to the Supreme Court in a sealed envelope, PNB sources told FC that Winsome Diamonds & Jew­el­lery allegedly figures with an outstanding amount of Rs 900.37 crore. The wilful defaulters list of PNB reveals that India’s second largest PSB has outstanding exposure of Rs 266 crore to MBS Jewellers, Rs 69 crore to C Ma­h­­endra Exports, Rs 45 crore to Gem Star Company, Rs 35 crore to KBM Gems & Jewellers, Rs 30 crore to Gha­n­­sham Das Gem & Jewels, Rs 29 crore to Future Jewels and Rs 17 crore to Jai Mata Jewellery. Someone in the bank obviously loves gem and jewellery makers.

As on March 31, 2017 the total fund based exposure to the gems and jewellery sector was Rs 2,360 crore. Its non fund based exposure to the same sector was another Rs 430 crore. PNB also had a large exposure in two other massive fiddles - Winsome Diamonds (total banking system exposure Rs 6,800 crore) and Shree Ganesh Jew­ellers (total banking system exposure Rs 2,200 crore). It has chosen not to learn from these fiascos and public money recapitalised by the governm­ent for PSBs come with the sovereign guarantee of the government of India. A forensic audit conducted by Ernst&Young after some of these aberrations proved conclusively that not only were there major lacunae in the system, but rogue employees were constantly compromised and involved in trickery, deception and defalcation.

Sandeep Bamzai