RBI blames PNB board for fraud

‘Banks had been warned of LoU risks’

RBI Governor Urjit Patel. File

Blaming the board of directors of the Punjab National Bank for the embezzlement of over ₹13,000 crore by jeweller Nirav Modi and his uncle Mehul Choksi, the Reserve Bank of India on Tuesday, in a written reply to the Parliamentary Standing Committee on Finance, said all “three lines of defence” built in the banking system failed in this case.

RBI Governor Urjit Patel deposed in front of the panel, headed by Congress leader Veerappa Moily. The Hindu has reviewed the two documents submitted by the RBI to the panel.

Adequately warned

The central bank said all financial institutions were adequately warned about dealing with Letters of Undertaking (LoUs), the primary tool of embezzlement by Nirav Modi. The RBI said it was the primary responsibility of the PNB board to understand the risks in issue of LoUs without collateral and to manage them through controls. It said each bank should have three lines of defence: first, the officer sanctioning the loan; second, at the managerial level; and third, the internal audit. “In the case of PNB, there seems to have been failure of all the three lines of defence.”

The RBI told the panel that its supervisory process does not constitute an audit of banks.

“With the number of commercial bank branches being more than 1,16,000 in the country it would be impossible to cover each and every branch under the RBI’s supervisory process,” the central bank said.

It also accused PNB of submitting a factually incorrect compliance report with regard to LoUs.

In its reply to the panel’s questionnaire, the RBI complained that it does not have regulatory powers over public sector banks (PSBs) which have the greater share of non-performing assets.

As on December 31 last year PSBs had NPAs worth ₹7,77,280 crore while the private sector banks had NPAs worth ₹1,07,796 crore.

The RBI said the main constraint was that public sector banks are “corporations” and not a “banking company” — so they do not come directly under the ambit of the Banking Regulation Act, 1949.

The central bank has asked for nine additional powers with regard to the public sector banks including the ability to “remove the Chairman and Managing Director and appoint them.” It also wants powers to grant and impose conditions on licences.

The RBI wants a say in appointment of managerial positions, including the power to supersede the Board of Directors and make application for winding up the errant banks.

Parliamentarians questioned Mr. Patel on the recent reports of ATMs running low on cash and the big question of exactly how much currency returned to the banking system after demonetisation. “Mr. Patel was not exactly forthcoming. He did not answer many of these questions. He insisted that steps taken to bring down the non- performing assets are bearing fruit and the NPAs are going down,” a senior Opposition MP who attended the meeting said.