Facing criticism over its supervisory framework following the Rs 11,394-crore fraud at Punjab National Bank (PNB), the Reserve Bank of India (RBI) has taken an unusual step of despatching teams to headquarters or important authorised branches of some banks to check if they have built in enough safeguards in their systems to avoid a recurrence of such scandals, banking sources told FE. In some cases, the teams also went to select branches of banks to see if banks’ claims matched their action on the ground, said a senior official with a public sector bank. The fraud at PNB — the single largest in the country’s banking history — has brought to the fore uncomfortable questions about the role of auditors, bank management, supervisors and the regulator, especially when it came to light that letters of undertakings (LoUs) had been fraudulently issued to firms of jewellers Nirav Modi and Mehul Choksi at least since 2011.
Finance minister Arun Jaitley has slammed inadequate oversight by regulators and auditors as well as sloppy bank management for the inability to detect the fraud on time and said laws would be further tightened, if required, to punish fraudsters. At the Economic Times Global Business Summit, Jaitley said regulators “have to have a third eye which is to be perpetually be open” and expressed concern that not a single red flag was raised by anyone when the fraud was perpetrated. The finance ministry also wrote a letter to the central bank last week, asking whether the framework designed by the RBI to prevent and detect such frauds was inadequate or the central bank was unable to ensure its effective implementation. For its part, the central bank has already listed out several steps for all banks to strengthen their systems — the most important being the linkage of banks’ SWIFT mechanisms with core banking by April 30 — in a fresh directive last week.
It also said, as part of its ongoing efforts for strengthening the supervisory framework, that it has been issuing necessary instructions to banks from time to time “on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks”. “The risks arising from the potential malicious use of the SWIFT infrastructure, created by banks for their genuine business needs, has always been a component of their operational risk profile. RBI had, therefore, confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016…,” it said. Earlier this month, PNB said LoUs were issued fraudulently by one of its branches in Mumbai to firms of Modi and Choksi through the SWIFT system, without making corresponding entries in the CBS, as was to have been done. Since the SWIFT mechanism and CBS were not linked, such activities escaped tighter scrutiny, causing the massive fraud, it had said.