New Delhi: On 29 January, Punjab National Bank (PNB) filed its first complaint with the Central Bureau of Investigation (CBI) on a banking fraud that is now estimated at nearly $2 billion. Jewellers Nirav Modi and Mehul Choksi are alleged to have raised credit overseas on letters of undertaking (LoUs) fraudulently secured from PNB. In an interview with Mint, PNB managing director and chief executive officer Sunil Mehta claimed the bank will bounce back in less than a year. Edited excerpts:
The fraud has brought to light the fact that there was minimal staff accountability. LOUs were issued without checks and the rotational transfer policy was flouted. Your comments?
The bank was the one to uncover it. The moment it (the fraud) came to the notice of the management, it was brought to the table. We realized there was a connivance of staff and we started fixing the problem. We registered FIRs (first information reports) with CBI against employees who were involved and against those responsible for supervisory lapses as well. This was quickly identified and acted upon and CBI and ED started search and seizure.
The fraud began in 2011. Why were these irregularities not reported or noticed in any internal inspections, if any?
Wherever there was a loophole in the system, we have started plugging them because earlier the SWIFT system did not have any connectivity with CBS (core banking system). That has been plugged and it was not just our bank, but several other banks had the same issue. RBI has come out with a uniform prescription that every bank should integrate SWIFT with CBS. Our bank has taken a strategic decision and the first module went live on 4 April and will complete the process by 30 April.
How can you be sure of avoiding another fraud of this magnitude?
The message has been sent to all our branches. This was not a system failure, it was a people failure. The person at the helm of the affairs, if he starts conniving, then anything can go wrong. To prevent it, we are segregating front line and back-office functions and all our foreign exchange transactions will be processed at the back office itself so that risk of people failure is minimized. We are following a similar process for credit as well. We are creating different verticals for it—processing, monitoring and recovering will now be separate. And for different processes, there will be different checks and balances.
Following the PNB case, several other banking frauds of varying degrees came to light. Where has the banking sector been faltering?
Frauds aren’t a new thing and wherever there is a financial sector, there is fraud. This is not just in India, but all over the world. Frauds aren’t unique to our country. Banks have been reporting frauds on a daily basis to RBI and those were being investigated. This fraud (Nirav Modi) was on an operational level and the magnitude was bigger; so it was highlighted more.
PNB has issued as many as 1,590 LoUs to Nirav Modi and Mehul Choksi’s groups. Will honouring the LoUs not hamper the bank?
We have the size and capability to handle this. Last year, the bank mobilized fresh capital of more than Rs12,000 crore. This number has given us a cushion to face this problem, and it will put us back by six months and not derail our system and not hamper our capability to lend; and we have not sought the help of the government to resolve this problem.
How do you plan to mend the damage to the bank’s credibility?
The challenges were there, there was negativity. We clarified our position just two days after the incident that the bank has the capability to handle this. Simultaneously, we had a meeting with the top management and the message was sent to all our branches that we need to assure all our customers and we had no major incidents where people asked for their money to be returned.
Will banning LoUs cripple trade finance for exporters?
Not at all, because LoUs were an instrument which were used by foreign branches of Indian banks. This is not an instrument which is universally accepted and neither is it a part of UCPDC (Uniform Custom and Practice for Documentary Credit). So, most foreign banks don’t even use LoUs for trade financing. And there are alternative instruments available in the international channel.
What is the trend as far as PNB’s level of non-performing assets (NPAs) as a share of advances is concerned and how do you intend to improve it?
If you see our data up to December, we were better among most banks and our gross NPA ratios were 12% as against some of banks which had 28%. Our gross NPA and net NPA ratios were reducing—quarter-on-quarter and year-on-year basis. We were on the right trajectory, and this was an unforeseen incident that put a dent on the bank’s working. Otherwise, we were better than the industry.
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