Lack of checks, balances reason behind PNB fraud
UNDER SCANNER RBI initiates assessment of the bank’s control systems MUMBAI:
Beneath the perfect storm of Punjab National Bank’s ₹11,400-crore fraud lies a series of lax processes and inadequate oversight, surfacing at a time when Indian banks are grappling with ₹10 lakh crore of stressed loans.
Interviews with executives from several state-run banks and experts reveal that jeweller Nirav Modi and companies linked to him were able to siphon off funds in concert with some PNB executives because of the failure of the bank to integrate its own transaction recording software with the international financial messaging system.
A central bank communication corroborates the same.
“The fraud in PNB is 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 Reserve Bank of India (RBI) said in a release on February 16. The RBI has initiated a supervisory assessment of PNB’s control systems.
Officials of Mumbai’s Brady House branch of PNB, without approvals, issued so-called letters of undertaking, or LoUs, (essentially guarantees) that helped Modi’s companies raise credit from other banks.
The foreign banks gave the funds to Modi companies on the assurance that PNB will pay up if there is a default.
According to bankers, transactions on SWIFT, an inter-bank messaging facility, must go through a built-in system of audit and reconciliation.
These include seeking approval from officials other than those having banking relation with the client, red flags for MTPA by 2020 from the current 247.6 MTPA. In 2040, the refining capacity is projected to rise to 439 MTPA.
The official cited above said the investment planned by IOC also includes in upgradation of major units at existing refineries to help produce cleaner Euro-VI or BS-VI grade petrol and diesel by April 2020.
Besides, IOC plans to raise capacity of its Panipat refinery in Haryana to 25 MTPA from current 15 MTPA while Koyali refinery in Gujarat would be expanded to 18 MTPA from 13.7 MTPA.
The recently-commissioned 15-MTPA Paradip refinery in Odisha will see a capacity addition of 5 MT while 3 MT will be added in IOC’s Barauni refinery in Bihar, he said.
A 1.2-MTPA capacity addition is planned for Uttar Pradesh’s Mathura refinery to take its capacity to 9.2 MTPA.
The official said IOC is also looking at adding a 9 MTPA refinery at its subsidiary Chennai Petroleum (CPCL). sudden spurt in transactions, and breach of sectoral and group exposure limits, among others. SWIFT stands for Society for Worldwide Inter-Bank Financial Telecommunication.
“In our bank, majority remittance transactions are centralised. In branch-originated transactions, there is mandatory reporting of all SWIFT messages to the zonal or head office at the end of day,” said senior official with a South-based bank, on the condition of anonymity given the sensitivity of the matter.
LoUs, issued when overseas import payments are involved, basically guarantee liability payment by one bank to another on behalf of its client. The messages on LoUs are sent through SWIFT.
PNB has maintained that transactions and messages sent through SWIFT were not recorded in its core banking system software, which typically records daily transactions. This allowed the errant employees escape notice of bank auditors.
While most state-owned banks still have not integrated SWIFT and CBS, some of them have started the process.
According to bankers, the advantage of linking both systems is that all transactions are recorded in the system and hence helps in calculation of liabilities.
A senior official at a large state-owned lender said his bank conducts at least three levels of checks for all transactions involving remittances.
First-level check is when the non-fund based exposure such as LoU are sanctioned and transmitted in SWIFT, second is to report the message to CBS and third is the routine process of management information system (MIS).