A senior banker disputed the claim made by PNB that the fraud went undetected because the bank’s core banking system (CBS) was not integrated with the Society for Worldwide Inter-Bank Financial Telecommunication (SWIFT), a global financial messaging system that was used to instruct foreign branches of Indian
to release money, amounting to Rs 114 billion over the years, for companies owned by Nirav Modi and Mehul Choksi. The executive also said all the LoUs issued by PNB were genuine and in accordance with norms set out by the Reserve Bank of India (RBI).
“Once our foreign branches transferred the money to the PNB’s nostro account how can it claim that the transaction was not recorded in its books? It should reflect in its accounts,” the banker said on condition of anonymity.
Two PNB employees at its Brady House branch in Mumbai fraudulently issued LoUs on behalf of the companies involved to foreign branches of Indian banks, including those of the State Bank of India (SBI), Bank of India, Axis Bank, UCO Bank, Canara Bank, and Allahabad Bank.
Through the LoUs, PNB issued an undertaking to these banks
that it would repay the amount borrowed by the companies involved in case of any default after a fixed period of time. The other banks deposited the foreign currency loans in the overseas account of PNB, known as a nostro account, which was transferred to the companies dealing with the Nirav Modi and Mehul Choksi group of companies.
During its internal investigation, PNB found the transactions were not routed through its CBS as it was not integrated with SWIFT, due to which the fraudulent transactions remained undetected.
“There were lapses at the level of the branch, controller and the auditor of PNB. We did not find any lapses on the part of our employees based in the foreign branches,” the bank executive said.
The affected banks have also said all the LoUs issued by the PNB were genuine and none of their foreign branches violated RBI guidelines as claimed by PNB. “Fresh pearls, for which the loan was taken, enjoy a credit facility of one year and not 90 days as claimed by PNB,” the executive said.
In its complaint to the Central Bureau of Investigation, PNB said the RBI prescribed credit for import of semi-precious and precious stones, including pearls, for a maximum of 90 days, but the credit allowed in most cases was for about 360 days.
“This should have evoked suspicion in the minds of overseas branches of Indian banks extending buyers credit. These banks never raised any alarm on violation of the RBI guidelines and continued to provide funding against the fraudulent LoUs,” PNB had written in its complaint.
Banks said on Monday that they would resolve the problems with PNB bilaterally. “We will settle all the LoU issues with PNB bilaterally. It is a matter among PSBs and we will settle it amicably,” SBI Chairman Rajnish Kumar told reporters after meeting Department of Financial Services Secretary Rajiv Kumar on Monday.
PNB said in a statement on Saturday that it would “honour all bona fide commitments under LoUs and foreign letters of credit as per the law of the land and directions of the RBI.” The statement came a day after the Indian Banks’ Association held a meeting in Mumbai to reconcile claims related to the fraudulent LoUs that ended in a stalemate with PNB partly blaming other banks and these, in turn, pointing out regulatory lapses on PNB’s part.
What other banks say
* Import of pearls attract a one-year credit window against 90 days under RBI norms as claimed by PNB
* Transactions cannot go undetected after funds are transferred in PNB’s nostro account
* All transactions were bona fide and PNB fully liable
* Scam took place due to PNB’s systematic failure at level of branch, controller, and auditor