Operational Risk and Nirav Modi

The risk that arises as a result of internal issues involving the company’s people and resources is known as operational risk. The human factor plays a big role in operational risk: errors or failures caused by employees’ actions or decisions.

Because this risk is difficult to quantify, management will have a hard time detecting risks. These risks involve the human mind, it is inherently uncertain. As a result, no models can calculate or create a definite prediction mechanism to identify operational chain defects.

The main feature of this risk is that it is impossible to quantify, but it is manageable. Good communication, a clear reporting chain, and a clear set of responsibility and accountability are three important aspects that management should take care of.

However, some companies take it all seriously and collect data every hour of the working day, resulting in a red tape situation. This may add to employees’ stress levels, affecting their psychological well-being and, in some cases, leading to senior employees’ resignations, even at management levels. As a result, the operational risk will increase even more.

Throughout the last century, there have been numerous scams. From the Baring bank scam in England to India’s PNB bank scam. Let me give you a detailed account of the PNB scam involving Nirav Modi, a well-known jeweller.

In this case, Nirav Modi is accused of taking large amounts of bad debt from foreign banks without putting up any assets or collateral. He was able to do so with LOU( letter of undertaking) from the PNB Bray House Branch,Mumbai. A LOU is a guarantee from the issuing bank to the receiving bank and the companies that it will pay a certain amount of money on a certain date. Because PNB is the second largest public sector bank, these LOUs are accepted by all foreign banks. According to CBI report on this scam, Nirav Modi defrauded over 11,000 crore rupees/1.7 billion dollars just by using LOU.

Operational mismanagement is the reason for PNB’s failure. CBI discovered that at least two individuals from the Brady House branch in Mumbai, deputy manager Gokulnath Shetty, and clerk Manoj Kharat, issued Letters of Undertaking (LoU) to Nirav Modi’s companies and their banks repeatedly without following the processes, without securing cash reserve or collateral, and without recording the transactions in the bank’s core banking software, the system on which the bank operates. This is a monumental failure on the part of PNB bank, which was unable to manage operational risks.