Page 48 - Banking Fiannce March 2018

FEATURE

February 2017 to Hong Kong branches of Allahabad Bank So, do the banks that provide this facility on the
and Axis Bank without authorisation. basis of an LoU have no responsibility?
Bankers say the bank receiving an LoU sends a letter of
The alleged fraud continued for seven long confirmation to the issuing branch and its controlling offices.
years without being detected. How? It is not clear whether receiving banks such as Axis Bank,
How — and how a handful of staffers could game the system Allahabad Bank and Union Bank sent such letters. And if they
— is baffling. The investigation should reveal details, but it did, the question is why no alarm was raised in PNB. It could
seems reasonable to assume that the fraud could have gone be that the receiving banks didn’t send the confirmation
on for so long only with the active collusion of a ring of letter. Or it could be that the letters were buried at PNB.
officials. One of the bankers now under arrest reportedly
handled transactions to provide credit to Nirav Modi’s firms The RBI said that the fraud in PNB was the
for seven years — in violation of the normal practice of result of delinquent behaviour by some
transfers every two or three years. SBI Chairman Rajnish employees, and the failure of internal controls.
Kumar said, “We don’t keep a person for more than three What are these internal controls?
years at one position. There are certain positions which are
Some have been listed in the answer to the question above
very sensitive and we monitor those positions very closely.
on how the fraud went on for so long. Ideally, SWIFT
Banking is a risky business.”
messages should have been checked by senior officials in
charge of the credit, investment or treasury departments
Again, in PNB’s case, one out of the three persons that that handle the foreign exchange business.
banks typically task to transmit SWIFT messages carried out
two roles, according to investigators. Also, several bankers Whenever such huge amounts are sent through SWIFT, daily
wonder how the delinking of SWIFT from CBS could have reports are generated. All banks, including PNB, have
been achieved without it being detected by the bank’s vigilance departments and fraud management committees.
information technology department. Banks also have internal branch audits and concurrent audits
involving external auditors. They also have risk management
These suggest a possible compromising of the sanctity of and audit committees at the Board level to ensure
passwords or authentication, and the breaching of compliance. The failure of all these controls is a serious
information technology systems. And the fact that at the concern, also because PNB had been hurt badly because of
very beginning, the approval for issuance of LoUs — whether lending in the past to Winsome Diamonds, which is now
forged or otherwise — for such huge amounts without it listed as one of India’s top defaulters.
being captured in the system or red-flagged, indicates a
major failure of internal control systems. What is the responsibility of the RBI itself?
Bankers say all LoUs have to be reported to RBI on a
OK, in the normal course, how do the banks quarterly basis. It is not clear if the regulator’s inspection
of the bank’s books revealed anything earlier. Till a few years
that lend to a company on the basis of LoUs, get
ago, RBI used to inspect branches of banks, but it has now
their money back? switched more to offsite monitoring. Successive RBI
Banks approach the lender that has issued the LoU — Governors have written to the government about the
because these are commitments made by the issuing bank conflict involved in having a central banker sitting on the
on behalf of a customer. Many banks receive their funds at Board of a bank that RBI regulates. But the government
the end of the 90-day period, after which fresh LoUs insists that having a regulatory representative helps with
may be generated, often to keep payments to banks going. checks and balances. This has led to debates on the
The investigation will look at allegedly forged LoUs that seem accountability of the government, which owns many banks.
to have helped the firms secure funding for long. The liability On Friday, the RBI said it had already undertaken a
for these LoUs is being contested by PNB — but other banks supervisory assessment of control systems in PNB, and would
are unanimous that it must honour the undertaking it gave. take appropriate supervisory action.

48 | 2018 | MARCH | BANKING FINANCE