Banks to knock at RBI’s door on PNB impasse

Banks to knock at RBI’s door on PNB impasse

Context:

• Banks are planning to approach the Reserve Bank of India (RBI) to break the impasse with the fraud-hit Punjab National Bank (PNB), which is declining to pay them the dues till investigations into the ₹11,500-crore LoU scam.

Introduction:

• All the banks first tried to convince PNB to honour the commitments.
• The banks have decided to approach the central bank through the Indian Banks’ Association (IBA).
• Last week, the state-run lender informed the stock exchanges about the detection of $1.77 billion (₹11,500 crore)-worth unauthorised transactions where fraudulent letters of undertaking (LoUs) were issued from a branch in Mumbai to secure overseas credit.

Supervisory assessment of control system:

• RBI had pointed out to the failure of internal control of PNB as being the main reason for the fraud taking place.
•  RBI is assessing the situation and would take appropriate supervisory action.
• The banking regulator had already undertaken a supervisory assessment of control systems in PNB.

What has happened?

• Recently, PNB found that the SWIFT system had been misused by a junior-level branch officials, who had fraudulently issued letters of undertaking (LoUs) on behalf of some companies for availing buyers credit from overseas branches of Indian banks.
• Preliminary investigation into the alleged fraudulent transactions worth ₹11,500 crore has revealed a complete breakdown of supervision and auditing mechanism in Punjab National Bank’s Mumbai branch and overseas branches of the other banks concerned.
• The transactions remained undetected for almost seven years, despite the fact that the bank conducts internal and external audits on a regular basis.
• Overseas branches of the other banks, which released payments on the request for settlement of import bills, also did not flag the discrepancies for such a long period.
• The bank has pinned the whole blame on the then Deputy Manager, Gokulnath Shetty, and a low-rank staffer for the fraudulent issuance of Letters of Undertaking (LoU) on behalf of the three firms associated with diamond merchant Nirav Modi and his family members.
• It is alleged that bills were also cleared for payments through PNB’s Nostro accounts with other banks that deal in foreign currency
• As per rules, those availing such a credit facility are required to repay the loan within 90 days of the issuance of an LoU.

SWIFT system

• In the PNB case, the accused officials misused the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) system to verify the fraudulently issued LoUs, conforming to the overseas branches of several banks that they could extend foreign exchange credit to the beneficiaries.
• The SWIFT system is mainly used for clearing international wire transfers.

Accused book under Prevention of Corruption act:

• The Central Bureau of Investigation has booked one retired and one serving PNB employee so far.
• The Enforcement Directorate has registered a money laundering case in the matter.
• It involves Mumbai-based billionaire diamond merchant Nirav Modi.