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PNB failed on all fronts to check Nirav Modi-Mehul Choksi fraud, says RBI

India June 13(IM): The Reserve Bank of India (RBI) on Tuesday put the blame of the $2-billion Nirav Modi-Mehul Choksi fraud on Punjab National Bank (PNB), including its board, and accused the state-run lender of furnishing “factually incorrect” compliance reports.

The RBI also defended its supervision on the grounds that the onus was on lenders and it was not possible for the central bank to audit over one lakh bank branches in the country.

“As regards the LoUs (letters of undertaking) issued for years without collateral by the PNB branch (in Mumbai) which went unnoticed, it is pertinent to recognise that primary responsibility of understanding the risks undertaken by a bank and ensuring that the risks are appropriately managed through necessary risk mitigants, controls, etc, clearly rests with the board directors of the bank concerned,” the regulator told a Parliamentary Standing Committee when RBI governor Urjit Patel appeared.

At the same time, it demanded fresh powers, arguing that the laws needed to be amended to give the regulator more teeth in supervising state-run banks.

The RBI contended that SBI and other nationalised banks were not “banking companies” defined by the Banking Regulation Act and they were governed by other laws. It then listed nine powers that it lacked, including the mandate to appoint and remove public sector bank chiefs, license them, convene a meeting of their boards or supersede the board. Further, the RBI said it did not have powers to order voluntary amalgamation or winding up or seek the Centre’s help for suspension of a state-run bank’s business and preparation of a restructuring plan.

The statement is expected to set the stage for a fresh battle with the finance ministry, which had questioned similar claims made by Patel earlier. Finance ministry officials have maintained that it only had powers to appoint and remove bank chiefs, which was also done in consultation with the Banks Board Bureau and the RBI.

In its submission to the Parliamentary panel, the RBI said it has suggested amendments to the law to empower the central bank to exercise “effective control” over public sector banks, as it did with the private players, on “an ownership-neutral basis”.

At the same time, the regulator sought to protect its turf and suggested that the proposal for an audit by CAG was “debatable” as there were three layers of audit — concurrent, internal and statutory. “It is debatable whether adding a fourth layer, of audit by CAG, will have much incremental impact.”

On the issue of fraud at PNB, the RBI’s detailed response said a bank’s risks were expected to be managed under three lines of defence. The first, it said, were the officials performing the line functions to assume, own and manage risks.

In the second line are risk monitors, specialising in overseeing decisions of the first line of defence. The final line are the audit functions. “In case of PNB, there seems to have been a failure of all three lines of defence, resulting in perpetration of such as large-value fraud,” it said.


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