PNB fraud a failure of internal controls, says RBI

As law enforcement agencies have intensified their hunt for billionaire diamantaire Nirav Modi and his associate Mehul Choksi, the Reserve Bank of India (RBI) denied media reports that it has directed PNB to meet its commitments under the Letter of Undertaking (LOU) to other banks.

The RBI statement said, "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. RBI has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action."

The central bank also warned of "appropriate supervisory action", saying it is assessing the control systems at Punjab National Bank (PNB).

Although the case has once again drawn the attention to large frauds in banking system, the RBI has been cautioning about it for some time.

In June 2017, RBI in its Financial Stability Report highlighted about frauds calling them as one of the emerging risks in financial sector. It had stated that in a number of large value frauds, serious gaps in credit underwriting standards were evident.

Data given by RBI in RTI, which is obtained by Reuters, revealed that PSBs have witnessed 8,670 loan fraud, valuing up to Rs 61,260 crore ($9.58 billion) between FY13 and FY17.

Meanwhile, PNB has suspended eight more officials, including one at general manager level, for their suspected involvement in the multi-crore scam, PTI report citing a senior government official said.

The official also said that PNB will repay other banks their dues by March 31 and that would be funded from internal resources.

The country's largest lender SBI, however, reportedly said it has an exposure of USD 212 million (about Rs 1,360 crore) in respect to LoU issued by PNB to Nirav Modi, but does not have any direct exposure to the jewellery designer.

Market regulator Sebi has reportedly launched a probe into trading and disclosure related issues of the state-owned bank, which has lost Rs 8,731 crore in market capitalisation in three days. The stock hit its 52-week low on both BSE and NSE yesterday.

Meanwhile, the Indian Banks' Association (IBA) has also convened a meeting today to deliberate on the ramifications of the scam, which has also affected other banks including SBI, Union Bank, Allahabad Bank and Axis Bank.

Chartered accountants' apex body ICAI has also taken suo motu cognisance of the fraud and has sought information from investigation agencies, besides setting up a group to study the systemic issues arising out of the case.

The Corporate Affairs Ministry has reportedly identified 150 shell companies related to Nirav Modi and his associates.