Is supervisory system adequate? Govt, RBI in talks after PNB fraud

Last week, the PNB said that a number of companies controlled by Nirav Modi and Mehul Choksi, in connivance with some bank officials, allegedly carried out fraudulent transactions worth Rs 11,400 crore.

Written by Sunny Verma | New Delhi | Updated: February 22, 2018 7:07:37 am
punjab national bank, pnb scam, RBI, nirav modi, pnb scam, Mehul Choksi, pnb fraud case, nirav modi audit report, cbi, Enforcement Directorate, indian express news The Punjab National Bank (PNB) branch where fraudulent transactions were detected. (Express Photo: Ganesh Shirsekar)

In the wake of the alleged loan fraud at the Punjab National Bank (PNB), the Finance Ministry has noted that the supervision and inspection framework of the Reserve Bank of India may either be “inadequate” or is not being “effectively implemented”, sources said.

The government has also flagged its concern on whether the CAMELS model of inspection — it stands for capital adequacy, asset quality, management, earning, liquidity and system and control — followed by the RBI is sufficient to detect and prevent largescale frauds such as the one at PNB.

Last week, the PNB said that a number of companies controlled by Nirav Modi and Mehul Choksi, in connivance with some bank officials, allegedly carried out fraudulent transactions worth Rs 11,400 crore.

Read | Nirav Modi, Mehul Choksi PNB scandal: Glossed over, auditors flagged loan default, forex violations

Sources said the government and the central bank are discussing whether various provisions of the Banking Regulation Act that empower the RBI to supervise banks and inspect their books, and taking action against erring officials and financial institutions, are being effectively used to prevent frauds.

Sections 35, 35A, 36 and 36 AA empower the RBI to inspect banks and their books, caution or prohibit banks in relation to transactions, scrutinise returns and statements of banks and, if required, remove the top managerial personnel working in a manner detrimental to the interests of depositors.

READ | Nirav Modi denies involvement in PNB fraud, says beleaguered jeweller’s lawyer

Apart from these specific powers, Finance Ministry sources said, the central bank has various control systems — reconciling transactions on real time or near real-time basis, generation and prompt verification of transaction reports especially exception reports, and inspection of systems and their audit.

Apart from provisions under the Banking Regulation Act, the government has also flagged RBI’s powers to carry out inspections for securing compliance from companies for rules under the Foreign Exchange Management Act, 1999, especially under Section 12.

The RBI and the Finance Ministry did not reply to queries for comments.

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“All banks are further required to report all large-value frauds immediately to the RBI and this information is captured in the Central Fraud Registry,” sources said.

Last week, the PNB said that the Letters of Undertaking (LoU) fraud by companies of Nirav Modi and Choksi started in 2011. The fact the biggest loan fraud at PNB went undetected and unreported for seven years indicate that the entire supervisory mechanism needs to be reviewed from the point of view of its implementation, sources said.

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

On Tuesday, Finance Minister Arun Jaitley said that additional mechanisms have to be put in place by supervisory agencies to ensure that stray cases are nipped in the bud so that they don’t become a pattern again.

“There is an important challenge where supervisory agencies must now introspect: What are the additional mechanisms they have to put in place to ensure that stray cases don’t become a pattern again? And stray cases are nipped in the bud and an example be made of people that these. are never repeated,” he said.

The RBI Tuesday said that “for strengthening of the supervisory framework in the country”, banks need to implement prescribed measures for strengthening the SWIFT operating environment in a time-bound manner.

The RBI also set up a committee to look into reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and steps needed to prevent it; factors leading to an increasing incidence of frauds in banks and the measures needed to curb and prevent it.

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