Why the Rs113.8b fraud went unnoticed for 7 years
new delhi — The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve Bank of India, at a physical centre of one of the world’s fastest growing major economies.
The branch, clad in a stately colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweller Nirav Modi that has shaken confidence in a state banking sector that accounts for some 70 per cent of India’s banking assets.
It was here, according to accounts from Punjab National Bank executives and government investigators, that a lone middle-aged manager, later aided by his young subordinate, engineered fraudulent transactions totalling about $1.8 billion from 2011 to 2017.
The bank says it is still investigating how they were able to do so and go undetected for so long. The accounts given by current and former executives who spoke to Reuters suggest an answer as simple as it is alarming: no one was paying attention.
The still unravelling story of how the fraud happened — which includes the alleged misuse of the SWIFT interbank messaging system and incomplete ledger entries — points to a breakdown in checks and balances, and standard banking practices, they said.
The apparent failure of anyone to notice the largest fraud in Indian banking history until this January reveals a “rot” in the state financial sector that goes beyond one lender, said Santosh Trivedi, who spent nearly four decades at Punjab National Bank before retiring in 2016 as a senior manager of audit and inspection in the New Delhi head office. “Unless this rot is controlled at this stage, to the satisfaction of the international community, it is dangerous for the Indian system,” Trivedi said.
As more details surfaced about what is alleged to have happened at the state-run bank, which was founded in 1894, the stakes have gotten higher.
A review of bank and government documents related to the case — and interviews with current and former PNB executives, bank auditors and experts — points to a lack of accountability and standards in the country’s public banking system. As of last September, those banks held about 87 per cent of the Indian banking system’s 9.46 trillion rupees of soured loans that are non-performing, restructured or rolled over.
A preliminary investigation by the nation’s tax authority said of the PNB fraud that “the hit Indian banks would take in the end may well exceed” $3 billion.
“Yes, there is a problem. We have recognised it,” bank chief executive officer Sunil Mehta said during an investor call on Friday. “We are in the process of fixing it up. We’ll see wherever the loopholes are there. The people-related risk, we are going to mitigate.”
But despite that promise of action, one current senior executive at the bank’s headquarters in New Delhi said further problems could not be ruled out.
“In Indian banks, we don’t work under ideal situation,” the executive, who declined to be identified, said during an interview at his office. “We are in the business of risk, you can’t say there won’t be road accidents.”
Asked about the password sharing, the senior Punjab National Bank executive said it was not best practice but in the everyday bustle of Indian banks it happens. “When you are flooded with customers in the morning, with 101 demands, you look for shortcuts,” he said. “You do somebody else’s work, somebody else does your work. You are not working in an ideal situation.”
A second senior executive at the bank’s headquarters, who also asked that his name not be used, echoed that sentiment.
After entering the transactions on SWIFT, the CBI documents said, branch deputy manager Gokulnath Shetty — who worked at the same branch from 2010 to 2017 despite normal bank practices of regular rotations — did not record them on the bank’s internal system. Because PNB’s internal software system was not linked with SWIFT, employees were expected to manually log SWIFT activity. If that was not done, the transactions did not show up on the bank’s books. —