Taking strong exception to the manipulation of the SWIFT interbank messaging mechanism at Punjab National Bank (PNB) that led to a Rs 11,394-crore fraud, the Reserve Bank of India (RBI) has directed all banks to link the SWIFT system to their core banking system (CBS) by as early as April 30, top official sources told FE. A similar communication to link the two systems was issued by the central bank in 2016 as well (without a strict deadline, though), and this massive fraud could have been averted had the banking system adopted it with seriousness, said a source familiar with the central bank move. The linkage will make it extremely difficult for employees issuing letters of undertaking (LoUs), a critical component of trade financing that is at the centre of the latest fraud, to bypass scrutiny of senior staff or auditors.
Earlier this week, the central bank said it had confidentially cautioned banks of such possible misuse of SWIFT on at least three occasions since August 2016, “advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences”. While the RBI hasn’t revealed the specific measures it had suggested, the source said one of the steps was to link SWIFT to the CBS to avoid potential illegal activities. PNB last week said LoUs were issued fraudulently by one of its branches in Mumbai to firms of jewellers Nirav Modi and Mehul Choksi through the SWIFT system, without making corresponding entries in the CBS, as was the procedure.
Since the SWIFT system and CBS were not linked, such activities escaped tighter scrutiny, it had said. Finance minister Arun Jaitley has already asked bank’s managements and auditors to introspect as to what went wrong and asked both internal and external auditors to take steps to ensure such fraud don’t recur. Following the scandal, the finance ministry has written to banks to tighten their systems, financial services secretary Rajeev Kumar said.
UCO Bank has declared an exposure of almost $412 million to fake LoUs offered by the PNB staffer, while Allahabad Bank accounts for almost $367 million. Union Bank and State Bank of India have exposures of around $300 million and $212 million, respectively. The central bank also set up a panel this week, headed by its former board member YH Malegam, to look at the divergence in asset classification and provisions reported by banks and those interpreted by the RBI’s auditors. The committee will also examine the increasing instances of fraud in the banking system.