Nirav Modi case: Stung by fraud, govt looks at supervisory failures in banks, RBI

PNB fraud case: The virtual heist that companies controlled by diamantaires Nirav Modi and Mehul Choksi appear to have carried out has embarrassed the govt that claims to provide scam-free governance. RBI had described the PNB fraud as “a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls”.

Written by Ravish Tiwari | New Delhi | Updated: February 19, 2018 12:10:09 pm
Nirav Modi case: Stung by fraud, govt looks at supervisory failures in banks, RBI The Punjab National Bank (PNB) branch where fraudulent transactions were detected. (Express Photo: Ganesh Shirsekar)

The alleged Rs 11,400 crore fraud at state-owned Punjab National Bank (PNB) has triggered concern in the top echelons of the government over apparent supervisory failures at the levels of both individual banks as well as the banking sector regulator, the Reserve Bank of India (RBI).

The virtual heist that companies controlled by diamantaires Nirav Modi and Mehul Choksi appear to have carried out has embarrassed the government that claims to provide scam-free governance.

“We need to review the supervisory mechanism in the banking sector to arrest similar rot in the sector elsewhere,” a senior government source said. “There are a variety of internal control mechanisms within the banks. The PNB case is a clear manifestation of the supervisory failure within the bank.”

Read | PNB Fraud: Auditor Deloitte rang alarm bells on Nirav Modi two years ago

The source added that “there must be action against those who failed to perform their supervisory role”, and “if it is found that some higher-ups in the bank ignored the red flags by the auditors, they must be held criminally responsible”.

The Sunday Express reported that Deloitte Haskins & Sells LLP, the auditor of Firestar International Ltd, the flagship firm of Nirav Modi, had raised concerns two years ago over weak internal control systems within the company and its Indian subsidiaries.

There is also a concern in the government over whether RBI’s tools and mechanisms are “inadequate” to prevent such frauds, and whether there is a “lack of effective implementation” of these mechanisms.

Read | Punjab National Bank fraud: How the system was gamed

“Has RBI failed to discharge its duty? This is a question that needs to be pondered over as well. RBI’s job does not end with insisting on transparency in the declaration of NPAs alone,” said the government source, who has been briefed on developments following PNB’s February 14 regulatory filing about the alleged fraud. “The PNB episode has clearly established that it is not a happy state of affairs in the banking sector. This rot has to be addressed by the government given the dominance of state-controlled banks.”

Nirav Modi case: Stung by fraud, govt looks at supervisory failures in banks, RBI Enforcement Directorate sleuths at one of Nirav Modi’s showroom in New Delhi on Thursday. (Express Photo: Tashi Tobgyal)

On Saturday, Chief Economic Adviser Arvind Subramanian had called for better regulation by RBI, asking, “What about the control exercised by the regulator or the supervisor? What was happening there as well?… Of course, there has to be an internal control, auditing has to be better, but there also has to be a better external control, better regulation and supervision.”

Read | Inside the Punjab National Bank fraud: What an LoU is, how case may impact the bank

On Friday, however, the central bank had described the PNB fraud as “a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls”. The regulator is likely to stress the need to first address the issue of accountability within. The RBI no longer carries out an inspection of bank branches and focuses more on offsite site supervision. It has written to the government several times in the past to say that it does not want to be on the board of PSU banks, given the conflict of interest involved in the regulator being part of decisions taken by an entity that it supervises.

Nirav Modi case: Stung by fraud, govt looks at supervisory failures in banks, RBI In picture, Nirav Modi

In the PNB case, the internal lapses seem to have taken place at multiple levels. These include the failure to detect a fraud that had allegedly gone on for seven years, and the flaws in the system that seem to have allowed rogue employees to send SWIFT instructions in the Modi-Choksi cases bypassing the bank’s Core Banking System (CBS), which is a sort of electronic ledger of all its transactions. In both cases, grave oversight — or possibly connivance — by senior officials and the bank’s information technology department is indicated.

Read | In December, Nirav Modi’s firm was moving to go public, raise funds

It also remains unclear whether the bank branches that received the LoUs sent a letter of confirmation to the issuing branch. Investigations so far seem to indicate also that the usual practice of sending SWIFT instructions through a three-stage process of making, verifying and authorising seems to have been bypassed.

Nirav Modi case: Stung by fraud, govt looks at supervisory failures in banks, RBI Vehicles called by ED to transport money, jewellery and documents from the Chanakya. (Express photo by Abhinav Saha)

The senior government source also said the time may have come “to think whether we need to change the ownership patterns of public sector banks to ensure better accountability”. A committee constituted by the RBI and headed by former Axis Bank chairman P J Nayak had, over two years ago, recommended that the government should distance itself from several bank governance functions, that government equity holdings should be transferred to a Bank Investment Company, and the boards of PSU banks should be professionalised.

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