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.
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