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PNB case fallout: Govt asks public sector banks to probe NPAs above Rs 50 crore

The directive comes in the wake of state-owned lender PNB reporting Rs 12,636 crore fraud through alleged fraudulent misuse of letters of undertaking by billionaire jeweller Nirav Modi and associates.

business Updated: Feb 27, 2018 23:59 IST
Remya Nair
Remya Nair
Livemint, New Delhi
PNB fraud,PSB,LoU
The logo of Punjab National Bank (PNB) is seen on a branch office window in New Delhi on February 27. (Reuters)

The finance ministry directed state-run banks to examine all bad loan accounts exceeding Rs 50 crore for possible fraud, a fallout of the multi-billion dollar scam at Punjab National Bank (PNB) that went undetected for seven years.

It also gave a 15-day deadline to state-run banks to take pre-emptive action, identify and address operational and technological risks, and adopt best practices to tighten their systems.

The government also stressed the need for accountability of the top management of banks and directed them to detect frauds and wilful defaults as per the Reserve Bank of India (RBI) guidelines, and to refer the cases to the Central Bureau of Investigation (CBI).

While this could pose an operational challenge to state-owned banks, in the process the Union government has signalled a toughening of stance and a sense of urgency in containing any fallout from the Rs 12,636 crore scam allegedly perpetrated by jeweller Nirav Modi on PNB.

These banks will be required to scrutinise a large number of accounts—no estimate was immediately available.

The gross non-performing assets (NPAs) of state run banks is estimated at nearly ₹8 trillion.

“Examining all NPA accounts of more than Rs 50 crore maybe a bit unmanageable for banks and will add to the regulatory compliance cost. It would have been better if the threshold was higher,” said Deepak Bhawnani, chief executive of Alea Consulting. “To mitigate future fraud, it is important for banks to check if the guidelines in place are followed at the branch level.”

In cases where there is suspected money laundering or violation of foreign exchange management, banks have been asked to involve the Enforcement Directorate and directorate of revenue intelligence.

Chief vigilance officers of banks have been asked to work with CBI for complaints on frauds exceeding Rs 50 crore. Banks have also been asked to seek a borrower status report from the Central Economic Intelligence Bureau once an account is declared an NPA.

The trigger for the government’s diktat comes in the aftermath of the PNB fraud. The scam put the spotlight on failures in systems and processes in PNB as well as in other banks.

Rajiv Kumar, secretary, department of financial services, explained the framework for timely detection, reporting and investigation of high-value bank frauds as well as the time frame for banks to strengthen their systems on Twitter.

A group of executive officers and chief technology officers have been tasked to prepare a blueprint to ensure the banking system’s preparedness for the operational and technological challenges.

Bank boards will have to assign clear accountability to senior functionaries for implementation and compliance.

First Published: Feb 27, 2018 18:33 IST