PNB crisis: RBI's Malegam-led panel to look into NPA divergence, bank fraud

Finance Minister Arun Jaitley
The Reserve Bank of India (RBI) on Tuesday constituted an expert panel that will look at the divergence in asset classification and provisions reported by banks vis-à-vis those interpreted by the central bank’s auditors, and also to examine the rising incidence of fraud in the banking system.

The panel will be headed by former RBI board member Y H Malegam, who had also earlier led several RBI committees on important reform measures.

The panel will explore “factors leading to an increasing incidence of fraud in banks and the measures (including IT interventions) needed to curb and prevent it; and the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and fraud,” the RBI said in a statement on its website.

The other members of the committee will be Bharat Doshi, member of the RBI board; S Raman, former chairman and managing director of Canara Bank and former whole-time member of the Securities and Exchange Board of India (Sebi); and Nandkumar Saravade, CEO of the central bank’s technology arm Reserve Bank Information Technology Pvt Ltd (ReBIT). A K Misra, executive director of the RBI, will be the member-secretary of the committee.

According to RBI rules, if the divergence between its assessment of bad debt and a bank’s declared bad debt is more than 15 per cent, the bank will have to report the divergence in its quarterly report. In the first lot, private sector banks reported a divergence of more than Rs 300 billion in their reports for 2015-16. However, in the latest quarter, the State Bank of India (SBI) shocked everyone by reporting a divergence of Rs 230 billion and some other public sector banks reported a wide divergence.

According to bankers, there was no reason for them to classify an account as bad debt if a bank was servicing its debt regularly. However, the RBI’s logic was that if the account was in default with one bank, there were high chances that it would be in default with others. And therefore all banks must classify the account as stressed.

In its revised framework on stressed assets earlier this month, the RBI ruled out any possibility of banks interpreting an account and indicated that if an account was in default with one bank, other banks in the consortium must recognise it and take necessary action to make the account good.

In the same notification, the RBI said it had warned banks at least thrice since August 2016 about the possible misuse and risks arising from the potential malicious use of the SWIFT infrastructure.

The central bank had asked banks to initiate some safeguards to protect their SWIFT system, but various banks are in different stages of implementing them. Now, the banking regulator wants banks to implement the safeguards within the stipulated deadline.

The RBI did not elaborate on the safeguards that it had prescribed to banks. A source in the central bank said these were security features in a SWIFT network and like a currency note, these could not be disclosed but would only be known to bankers so that any breach in the system could be caught.
Reports suggested the SWIFT password was handed over to Nirav Modi affiliates, which raised fake letters of undertaking (LoU) to exploit the system.

“The risks arising from the potential malicious use of the SWIFT infrastructure created by banks for their genuine business needs has always been a component of their operational risk profile,” the RBI said in a statement, adding it had “therefore, confidentially cautioned and alerted banks of such possible misuse at least on three occasions since August 2016, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences. Banks have, however, been at varying levels in implementation of such measures.”

The Malegam committee would also examine the rising incidence of fraud in Indian banks and suggest methods to minimise them, said the RBI statement posted on its website. 
Govt will chase down those who cheat the banking system: Jaitley

"Supervisory agencies need to assess what new system has to be put in place"

"Auditors have to look inwards as to why they were unable to detect irregularities"

"Bank managements did not live up to  the task and failed to detect delinquents"

The CBI on Tuesday arrested Vipul Ambani, president (finance) of Nirav Modi's Firestar Diamond, in the Rs 114 billion fraud in Punjab National Bank (PNB), making it the first high-profile arrest in the case, officials said. Four other senior executives of the accused firms were also arrested by the agency.

Income tax officials on Tuesday questioned Punjab National Bank Managing Director and Chief Executive Officer Sunil Mehta in the bank fraud allegedly involving Nirav Modi and the Mehul Choksi group of companies. “The I-T department came to the PNB headquarters for questioning, which went on for hours,” said a source.

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