PNB case: Jaitley talks tough on bank fraud, RBI sets up panel to suggest measures

The RBI statement comes as the central bank has been under the spotlight after Punjab National Bank disclosed last week it had been hit by a $1.77 billion loan fraud.

business Updated: Feb 20, 2018 23:54 IST
Remya Nair and Alekh Archana
SWIFT (Society For Worldwide Interbank Financial Telecommunication) is an infrastructure to provide secure financial messaging services across the globe. (Reuters File Photo)

Finance minister Arun Jaitley broke his silence on Tuesday, delivering a stinging rebuke to the auditors and the management of Punjab National Bank (PNB) for their failure to detect the Rs11,400 crore fraud.

Further, in a veiled reference to the Reserve Bank of India (RBI) Jaitley added, “supervisory agencies need to assess as to what new system has to be put in place to detect irregularities...(they) should ensure the stray cases are nipped in the bud and they are never repeated.”

The finance minister was speaking on Tuesday evening at the 41st Annual Meeting of Association of Development Financial Institutions In Asia and the Pacific.

Coincidentally, around the same time, the central bank announced the setting up of a panel under the chairmanship of Y.H. Malegam, a former member of the central board of directors of RBI, to study rising cases of fraud in banks and set out a blueprint to curb them.

RBI, a subject of recent criticism in some quarters, also defended itself claiming that it had warned banks, confidentially, of possible misuse of SWIFT system on at least three occasions since August 2016.

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication.

Earlier, Jaitley reiterated the government’s commitment to pursue unethical businessmen who have cheated the banks till its last ‘legitimate capacity’ and till the ‘last possible conclusion’.

This is the first official reaction of the finance minister to the fraud detected at Punjab National Bank involving jeweller Nirav Modi and Mehul Choksi of Gitanjali group.

Jaitley said that the taxpayers have invested heavily in the banking system. At the same time, in line with the commitment made by Prime Minister Narendra Modi at the Gyan Sangam, the government no longer interfered in the commercial decision making process of the banks.

“(We have told you) we want you to be autonomous, none of us are going to call you up, and therefore take your own decisions. When authority is given to the managements you are expected to utilise that authority effectively and in a right manner,” Jaitley said. “Therefore, the question for the management itself is were they found lacking. And on the face of it, the answer seems yes they were. You are found lacking when you are unable to check who amongst them were delinquent,” Jaitley said.

Investigation agencies are investigating employees of PNB for colluding with the accused. According to the modus operandi, PNB employees helped issue letters of understanding to the firms without recording them in the bank’s books. These LOUs were then used to borrow money from international branches of other banks.

Pointing out the failure of the auditors to detect the scam, Jaitley said, “What were the auditors doing? Both internal and external auditors really have looked the other way or failed to detect,” he said, adding that the profession of chartered accountants should start introspecting and take corrective steps.

He also pointed out that these events pose a fresh setback to the banking system which was in the middle of resolving its bad debt problem through the insolvency and bankruptcy code and the recapitalization of banks

Jaitley also said the supervisory agencies will have to introspect and see what additional mechanisms have to be put in place. The FM argued that such instances of fraud have a direct and an indirect cost. Besides the direct cost to the taxpayers, there is an indirect cost as it impinges on the lending capacity of banks.

“The fraud clearly points to management inefficiency and the lack of internal systems and controls. As a regulatory agency, RBI cannot escape responsibility and I think the finance minister is correct in asking these questions” said Rajesh Chakrabarti, professor and vice-dean at the Jindal Global Business School.

RBI’s move to set up a high-level panel comes at a time when questions are being raised about the inadequate regulatory supervision of banks.

“The risks arising from the potential malicious use of the SWIFT infrastructure, created by banks for their genuine business needs, have 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, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences,” the central bank said in a press release.

The new RBI panel will also study the reasons for divergence in reporting of asset classification and provisioning by banks as compared to the central bank’s assessment and recommend steps to prevent it. Additionally, the committee will also examine the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and frauds. State Bank of India’s NPA divergence — the difference between RBI’s assessment and that reported by the lender — was around Rs23,239 crore at the end of March 2017.

First Published: Feb 20, 2018 20:32 IST