PNB POST NIRAV MODI SCAM

WRITTEN ANALYSIS AND COMMUNICATION – I

Instructor: Prof. Avani Desai

Academic Associate: Ms. Aneri Taskar

Submitted by: Aaditya Agarwal (18001) & Prakhar Tosniwal (18046)

On

Date: July 29, 2018

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

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 LETTER OF TRANSMITTAL

To,
Mr. Sunil Mehta,
MD,
Punjab National Bank

Date: July 29, 2018

Subject: Recommendation for the future growth trajectory

Dear Sir,
Please find enclosed a detailed report analyzing the post-Nirav Modi scam
situation of PNB and the in-house flaws that resulted in the occurrence of the fraud.
We have analyzed various feasible alternatives and have generated a recommendation
we believe is in the best interest of the bank.

Sincerely Yours,
Aaditya Agarwal and Prakhar Tosniwal

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EXECUTIVE SUMMARY

The banking industry, specifically PNB, is plagued with an increase in financial

frauds. The Nirav Modi scam with fraudulent Letters of Credit (LCs) is the latest one.
This has happened due to a lack of systematic in-house HR and technological
capabilities and improper lending practices. This scandal has prompted a need for
action which helps rebuild the lost reputation, is feasible and sustainable to ensure
PNB remains “the most preferred bank.” Therefore, it is recommended that along
with Mission Parivartan, PNB should revamp the training and development facilities
and adopt digitization which reduces the manual interventions in banking processes.
This scam produces an opportunity for PNB to reinvent its functioning and prepare
itself for future growth.

(Word count= 116)

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CONTENTS

SITUATION ANALYSIS…………………………………………………………. 05

THE PROBLEM…………………………………………………………………… 06

ALTERNATIVES…………………………………………………………………..06

EVALUATION CRITERIA……………………………………………………...... 07

ANALYSIS OF ALTERNATIVES...........................................................................07

RECOMMENDATION……………………………………………………............. 08

ACTION PLAN……………………………………………………………………. 09

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SITUATIONAL ANALYSIS

The banking sector in India as a whole is going through a tough time with increasing
instances of fraud. This was a result of ecosystem faults wherein collusion amongst
influential stakeholders get amplified by poor audit quality and lack of swift judicial
action.

PNB’s internal banking processes are also sub-par. The primary problems are optimal
procedures not being in place and insufficient follow-up on processes that exist. These
problems, quite evident by the scam, are severe in PNB because of lack of
accountability amongst employees.

PNB employees enjoy job security but suffer from limited career management. The
problem starts with the recruitment stage itself wherein there is a lack of talented young
individuals and rigorous background checks. These issues are compounded by low pay
and culture of politics, eroding the motivation to work efficiently. Also, there is a
limited organizational focus on training and development of employees. The infrequent
rotation of employees creates a complacent environment, causing systemic acts of
omissions like not following up on RBI guidelines and thoroughly checking customer
backgrounds.

Beyond the human resources, PNB has questionable operating systems which have
made frauds a possibility. Core Banking System (CBS), which wasn’t integrated with
the SWIFT system properly, required manual interventions because of which fraudulent
issuance of Letters of Credit (LoCs) wasn’t flagged in the internal network. The
password sharing amongst employees defeated the purpose of RBI guidelines stating a
clear division between the maker, checker, and verifier. The absence of a NOSTRO
mirror account and pending migration to Finacle 10 were being considered seriously
only post-Modi scam. Presence of some of these systems could have prevented
instances of fraud.

Thus, there is a need to ensure speedy redressal of the current state of affairs and help
PNB grow in the future. The bank needs to rebuild its damaged reputation amongst

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customers and the industry by implementing solutions which not only provide quick
results but are robust and sustainable. This would prevent such frauds from occurring,
detect if they happen and improve the overall efficiency of PNB’s operations to fuel its
growth in the future.

PNB under Mr. Mehta’s leadership has launched “Mission Parivartan,” a strategy to
address some of these concerns. The focus is on the future of the company by enhancing
the current “people, process and product.” However, the mission is not ambitious
enough to target all the problems plaguing PNB. It is focused on evolutionary
improvements by building upon the current setup. The issues in PNB are deeply
entrenched as evident by the fact that the Modi scandal went undetected for seven years.
This would require changes in fundamental modes of functioning at a human resource
level with enhanced employee capabilities and operational level which should include
digitization. Incremental improvements and verbal motivations might not be enough.

THE PROBLEM
What steps should PNB undertake to shift from the current situation of a tarnished
reputation and questionable processes and practices to a paradigm of robust internal
systems to avoid frauds in the future, achieve sustained growth and maintain its image
as “the most preferred bank.”

ALTERNATIVES
PNB could -
1. Continue with Mission Parivartan only and give it time to show results
2. In addition to Mission Parivartan, immediately increase hiring at all levels and
make lending approval practices more stringent
3. In addition to Mission Parivartan, fundamentally restructure the employee training
and development practices and move towards digitization of all possible bank
processes

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EVALUATION CRITERIA
The accepted recommendation should-
1. Restore faith amongst the customers and reputation of PNB in the banking sector
2. Be feasible operationally and financially
3. Lead to sustainable change in PNB’s system to prevent fraud instances in the future
Criteria are arranged in the decreasing order of importance.

ANALYSIS OF ALTERNATIVES

Alternative 1
Mission Parivartan encompasses both the stakeholder relationship aspects and a focus
on the bottom line. The latter, when enhanced, will bolster the reputation of the bank.
This is primarily because banking is driven by network effects, i.e., a bank with higher
profits and clients is perceived to be better. Given this is an initiative of the bank
leadership, the mission will be feasible.
However, the fact that it builds on current flawed practices is the concern. Parivartan
doesn’t fundamentally change how PNB’s practices are structured. Many of the proper
business processes already exist but are not followed due to reasons such as PNB
employees being overworked. Parivartan by not addressing this cause will not lead to
sustainability in operations.
This all suggests that implementing only Mission Parivartan is not ideal.

Alternative 2
This course of action builds on the first alternative’s course of action. Mission
Parivartan is important, but the scale of reputational impact of the scam necessitates
more action to be taken. The spike in hiring at lower levels will ease some of the
workloads per person, and the stringent lending norms will reduce lending to riskier
clients.
These measures will help with PNB’s reputation, and faith concerns as these are visible
changes highlight PNB as an action-oriented organization. However, at the same time,
there is a question mark on the feasibility. Hiring more people without a system of
proper background checks presents a risk of hiring poor quality candidates.

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Stringent lending practices may show short-term results of lower NPA growth but are
not sustainable for a competitive bank. Organizational culture also does not change with
mere hiring and requires institutional level changes.
This alternative while better than alternative 1, might be a knee-jerk reaction to a
problem which requires a different systemic approach.

Alternative 3
This course of action also builds on the first alternative course of action, retaining
Mission Parivartan along with other measures.
This alternative assumes that PNB work culture does not promote employee
development which leads to lower motivation and hence, organizational setbacks. A
system is only as good as its administrators, and PNB needs to invest more in the
training and development of its employees.
The focus on digitization in conjugation with training is to reduce the world load of the
employees and the process subjectivity that human interventions can cause. A well-
developed digital architecture with minimum well-trained human interventions is the
ideal solution for minimizing frauds as the conditions leading to fraud, malintent, and
procedural deficiencies, are addressed.
This solution will improve PNB’s reputation in the industry and increase customers’
faith as PNB would be seen as a company focused on the future with digitization. While
it might be a costly intervention, it will be operationally easier to implement because
no stakeholder interest is adversely affected in this option. As PNB envisions to grow
in the future, these solutions will allow it the capabilities to scale up quickly and
sustainably to better manage its growth.

RECOMMENDATION
The recommendation is that along with Mission Parivartan, restructure the training and
development practices and move towards digitization.

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ACTION PLAN
1. Introduce entry level and refresher training based on industry best practices for
enhancing skill sets and industry ethics. The training should focus on the
importance of RBI guidelines, risk management and the negative impact of
fraudulent practices.
2. PNB should hire a 3rd party organization to develop a robust digital architecture for
all the digitizable bank processes.

(Word count=1196)