Critical lapses, blatant violations led to Nirav Modi fraud: PNB report

A $2 billion fraud at India's Punjab National Bank (PNB) may have been orchestrated by a few rogue employees, but it escaped detection because of widespread risk-control and monitoring lapses in many areas of the bank, the bank's own internal probe has found.
PNB, India's second-biggest state-controlled lender, has previously alleged that a handful of staff at a single Mumbai branch issued fake bank guarantees over several years to help two jewellery groups - controlled by Indian diamond magnate Nirav Modi and his uncle Mehul Choksi - raise billions of dollars in foreign credit and commit India's biggest-ever bank fraud.
The bank's CEO Sunil Mehta told Reuters in April he had suspended 21 officials and "will not spare" others found involved in lapses, but he also described the fraud as a "small turmoil".
However, a 162-page internal report, produced by PNB officials tasked with probing the fraud, lays bare lapses that go far beyond a few branch officers. The report, a copy of which was reviewed by Reuters, lays out how failings by 54 PNB officials - ranging from clerks to foreign exchange managers, and auditors to heads of regional offices, allowed the fraud to be perpetrated. Eight of the 54 are among those who have been charged by the federal police for their roles in the scandal.
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The report, which the PNB officials presented to the bank's fraud risk management arm on April 5, along with dozens of pages of annexed bank records and internal e-mails, is also part of the evidence submitted by the federal police in its court case against those allegedly involved in the fraud. The report's findings have not previously been made public.
DAMNING CONCLUSIONS
The unearthing of the fraud in January has not only exposed shortcomings in the management of PNB, but has also undermined confidence in India's state-run banking sector, which controls over two-thirds of the nation's bank assets.
The damning conclusions of the report stand in contrast to the lack of regulatory action taken by the authorities since the fraud was reported.

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No penalty has been imposed on PNB as a result of the fraud and there has been no senior management shake-up.
A PNB spokesman told Reuters the bank "cannot share details on a sub-judice case". He added: "We must reiterate that we will not spare anybody who is found guilty irrespective of the level or position in the bank," he said.
PNB did not respond to a question about what action was taken against the "erring" officials mentioned in the report.
The Reserve Bank of India, the nation's central bank, and the Indian government's federal banking secretary, Rajiv Kumar, didn't respond to requests for comment.
The report does not say whether the PNB investigators believe those involved in the monitoring failures were aware of the fraud.
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Significantly, they said one of the reasons the fraud went undetected for years was because of lapses within some of the bank's critical areas at its New Delhi headquarters, such as its credit review and international banking units.
"There was enough evidence to suggest failures," the team of four senior PNB investigators said in its report. "It was observed that blatant system violations/unethical practices/dereliction of responsibilities led bank to such a catastrophe."
FRAUD AT BRADY HOUSE
The epicentre of the fraud was PNB's Brady House branch, housed in a building with an imposing colonial facade in downtown Mumbai. From there, deputy manager Gokulnath Shetty for years issued fraudulent credit guarantees over the SWIFT interbank messaging network, the bank and prosecutors have alleged.
Using those guarantees, companies controlled by Nirav Modi, whose jewellery creations were once adorned by global celebrities, and Choksi, received credit from banks overseas to fraudulently fund their businesses, PNB alleges.
Modi and Choksi, both of whom left India before PNB filed its first police complaint on Jan 29, have denied any wrongdoing.
Shetty's lawyer has said his client is not guilty.
All face charges of criminal conspiracy and cheating, as well as allegations under India's prevention of corruption law.
A police source told Reuters on Monday the federal investigating agency last week asked the international police agency Interpol to help locate Modi and Choksi.
Calls and text messages to lawyers for Modi and Choksi went unanswered.
LACK OF INTEGRATION
Shetty escaped detection because he did not log his SWIFT transactions on the bank's internal software - something he was supposed to do because the two systems were not integrated.
PNB investigators said the bank's international banking department and the IT division had delayed the integration work.
They had also not complied with central bank advisories in 2016 calling for a comprehensive audit of SWIFT systems in use.
But more simply, the fraud could have been detected if the branch did the basic daily SWIFT reconciliation that, according to internal rules, required logs of transactions on the global payments network to be manually checked against the bank's internal system, the investigators said.
"Only one activity would have nailed the whole act at the incipient stage," said the report.
The lapses, however, extended beyond the branch.
As per protocol, the daily reconciliation reports should travel up the chain to PNB's headquarters in New Delhi. Along the way, they would be signed off by the Brady House branch head and sent each month to a Mumbai city regional office that would issue all-clear certificates for the branches it controls.
But despite receiving just two of the 12 monthly reports from the Brady House branch last year, the regional office signed off on a "false" compliance certificate, signalling a clean bill of health for the branch, the report said.
Moreover, despite a massive missing paper trail, none of the senior inspection officers, who conducted 10 visits between 2010 and 2017 to the branch, reported anything "adverse", PNB's report stated.
MISSED MAJOR RED FLAG
The Mumbai city regional office also missed another vital red flag - the Brady House branch was a star performer, largely because of its dealings with Modi firms, the PNB report said.
Its import and export transactions in the 12 months to March 2017 stood at $3.3 billion, 50 percent higher than recorded two years prior. "The exceptional growth should have been noticed," the report said.
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A former PNB internal audit official who declined to be identified but reviewed the growth numbers mentioned in the report for Reuters, said: "This was sufficient to raise a cause of concern and the reasons thereof should have been investigated."
Signs that audit practices at Brady House were weak were also flagged by the branch itself, according to two internal PNB documents reviewed by Reuters.
In March 2012, the branch said in an internal memo that an almost 50 per cent of the observations flagged in its annual inspection report mainly auditor queries - remained "un-replied/unattended to by respective concerned officers", calling it a "critical situation".
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Four years later, in 2016, the branch's assistant general manager issued an internal memo saying around 18 observations -- five described as zero-tolerance level issues -- were pending.The memo was signed by 10 bank officers, including Shetty.
LATE-NIGHT EMAILS
Shetty joined the forex division at Brady House in April 2010. In March 2011, the branch issued the first fake credit guarantees of $15.5 million to Modi's firms through SWIFT messages, bypassing the internal banking system, the PNB investigators said.
Over the coming years, Shetty authorized more than 1200 fraudulent credit guarantees, the report said.
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As a mid-level employee, Shetty should only have been able to approve transactions of up to 2.5 million rupees ($37,000) without sign-off from more senior officials. But he had been given unlimited approval powers, the investigators said without explaining how this happened.
In the few weeks before his retirement in May last year, Shetty used his personal Yahoo e-mail address to send 22 e-mails -- 18 at around midnight -- to reconcile large forex transactions involving the Modi group. The use of personal e-mail was "overlooked" by the bank's treasury department, the report said.
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Under PNB policy, no officer should remain in the same office for more than three years, but Shetty retired after serving in Brady House for seven years. Three transfer orders were issued for him during his tenure, but he was never moved, the investigators found.
The report said that it is "incomprehensible" that branch staff did not notice the fraud being committed.

Now PNB tightens norms to separate loan appraisal and monitoring teams

To avert any future fraud, the 124-year-old state-run lender Punjab National Bank said that it has strengthened internal audit controls by having separate "pre-sanction appraisal and post sanction monitoring" teams for credit disbursal.
Besides, the lending major told IANS that it will look on a quarterly basis on whatever internal accruals can be generated -- through recovery, more efficient risk management, more business generation and more cross selling.

"We have strengthened our process of underwriting of credit to wean out any possibility of fraudulent behavior and ensure a fair evaluation," a senior official of the bank told IANS on the sidelines of PNB's 124th Foundation Day held on April 12.
"The process has been divided into four components with different employees focused on -- sourcing appraisal, processing and underwriting documentation and disbursement recovery."
These new developments are part of the bank's "Mission Parivartan" under which an independent think-tank has been set-up within the company to provide "both directional and policy inputs".
Recently, the bank has faced a multi-billion fraud related to the Nirav Modi and Gitanjali Diamonds group.
According to the bank, its Board has also approved revamping of the process and given higher weightage to the off-site monitoring mechanism.
"The analysis from the off-site monitoring mechanism will reduce dependence on physical inspection and audit to identify risks and the detachment between the front office and off-line monitoring system will drive greater transparency in reporting," the senior official said.
In addition, the state-run lender has decided to deploy Artificial Intelligence (AI) for reconciliation of accounts for technology interventions to counter the repeat of recent fraud.
On the problem of non-performing assets (NPAs), the bank has decided to form a separate "vertical to deal with its stressed assets".
In terms of new products and services, the state-run bank on its foundation day informed about several new initiatives like "pre-approved credit card" which are issued on a customer request through SMS and PNB's UPI partnership with the "Walnut App".
"In the next 100 years, I believe that PNB has an opportunity to reach even more people especially those without financial access and continue to empower MSMEs and countless businesses to realise their true potential," said Sunil Mehta, MD & CEO, Punjab National Bank.

Fake LoUs: PNB agrees to honour Rs 60 bn of other banks' pending claims

Punjab National Bank on Wednesday decided to clear all other banks’ dues to be paid before March 31 in relation to the Rs 129-billion fraud case.
The decision came after the finance ministry’s meeting on Tuesday with a few bankers, including those from Punjab National Bank, to break the stalemate between banks on the fraud related to fake letters of undertaking issued for group companies of diamantaire Nirav Modi and his uncle Mehul Choksi.
“PNB will honour all the claims due to be paid before March 31 to other banks. The bank's board has been apprised about the same and the bank will start disbursing the liability amount soon,” sources said.
PNB will ask other banks to submit an undertaking that it will refund the money against fake LoUs wherever the involvement of its officials is established by investigative agencies, the source added.
PNB sources said a clarification had come from the finance ministry to discharge all pending dues to banks for the LoUs issued since 2017. They added that PNB had to clear dues worth around Rs 60 billion to other banks, including Union Bank of India, Uco Bank and State Bank of India, by March 31.
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 nostro account, which was transferred to the companies dealing with the Nirav Modi and Mehul Choksi group of companies.
PNB had partly passed the blame on foreign branches of Indian banks for lack of due diligence on the fraudulent LoUs. PNB said the LoUs were not issued as per RBI guidelines and other banks did not raise any alarm.
However, the affected banks have said all the LoUs issued by the PNB were genuine and none of their foreign branches violated RBI guidelines as claimed by PNB.

PNB scam: 107 firms, 7 LLPs under SFIO scanner, govt tells Parliament

The government has ordered investigation to be carried out by the Serious Fraud Investigation Office (SFIO) into the affairs of 107 companies and seven limited liability partnerships (LLP) pertaining to multi-billion fraud in Punjab National Bank (PNB), Lok Sabha was informed on Friday.
"The government has ordered investigation into the affairs of 107 companies and 7 LLPs under the provisions of Section 212(1)(c) of the Companies Act, 2013 and Section 43(3)(c)(i) of Limited Liability Partnership Act, 2008 on 17.02.2018 belonging to Nirav Modi (Firestar Diamond group) and Mehul Chinubhai Choksi (Gitanjali Group) to be carried out by the Serious Fraud Investigation Office connected with Punjab National Bank Fraud wherein all matters in their entirety will be examined," Minister of State for Corporate and Law & Justice, P.P. Chaudhary said.

The investigation is under progress, he informed.
On March 7, continuing the probe into the PNB fraud, sleuths of the SFIO questioned the bank's Managing Director and CEO Sunil Mehta for five hours.
The SFIO had also summoned top executives of ICICI Bank and Axis Bank for questioning into this matter.

Before Nirav Modi scam, PNB lost Rs 28 bn to various frauds in FY17

India's Punjab National Bank lost Rs 28 billion ($431 million) to various frauds last financial year, the government said on Friday, making it the biggest such loser among all state-owned banks even before it uncovered an alleged $2 billion fraud this year.
The country's second-biggest state-owned bank in February accused two high-profile jewellers and their companies of colluding with rogue bank employees to secure credit from overseas lenders using fraudulent guarantees between 2010 and 2017.

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This has been dubbed as the biggest bank fraud in India's history, but the finance ministry told parliament that even before the fraud came to light, state banks lost a total of Rs 195.33 billion to 2,718 cases of fraud in the year that ended on March 31, 2017.
Punjab National, better known as PNB, alone reported 158 cases of fraud in 2016/17, the ministry said. PNB did not immediately respond to a request for comment.
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In monetary terms PNB was followed by Bank of India, which lost 27.7 billion rupees, and State Bank of India that lost 24.2 billion rupees, the ministry said.
The ministry did not specify the nature of the frauds but added that the central bank recently formed an expert committee to look into "factors leading to increasing incidence of frauds in banks and the measures needed to curb and prevent it".
The committee will also look into the role of auditors in checking frauds.
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Reuters reported last month that India's state-run banks reported 8,670 "loan fraud" cases totalling 612.6 billion rupees over the last five financial years up to March 31, 2017.
In India, loan fraud typically refers to cases where the borrower intentionally tries to deceive the lending bank and does not repay the loan.
ALSO READ: The treadmill of business frauds: From 1957 LIC scandal to PNB scam
A parliamentary committee on finance said in a report on Friday that it was "extremely concerned about the recent fraud detected in Punjab National Bank, which clearly reflects that a small group of individuals can manipulate such a gigantic bank and compromise it despite such well laid out norms, guidelines, checks and balances."

The reason why extent of fraud unravelling at PNB could rise beyond $2 bn

The extent of the unravelling fraud at India's state-run Punjab National Bank could rise beyond the nearly $2 billion mark so far outlined by the lender, according to a source involved in the probe and court documents reviewed by Reuters.
The source, who asked not to be named, said investigators had not yet recovered all the papers and loan guarantees allegedly issued by rogue employees of the bank, and consequently believed the bank's exposure could be greater than revealed so far.

In what has been dubbed as the biggest fraud in India's banking history, Punjab National (PNB) and police have accused two jewellery groups - one controlled by diamond tycoon Nirav Modi and the other by his uncle Mehul Choksi - of colluding with bank employees to get credit from overseas banks using fraudulent guarantees.
Both Choksi and Modi have denied the allegations and lawyers for the two key accused PNB employees in the case have also said they are innocent.
According to court filings, the exposure to three companies controlled by Modi has been estimated at Rs 64.98 billion ($999 million), while firms controlled by Choksi have been accused of defrauding the bank of 61.38 billion rupees.
India's federal police, the Central Bureau of Investigation (CBI), has told a Mumbai court that the amount involving Modi's companies was likely to go up, according to the source and court filings, copies of which have been reviewed by Reuters.
The CBI told the court that its investigation had found that the fraudulent issuance of letters of undertaking (LoUs), or guarantees, through a Mumbai branch of the bank had been going on since 2010.
In papers filed on Monday, the CBI also said PNB did not have all the documents related to the LoUs, since those were returned to the borrower.
"Most of these documents are not yet recovered.
The size of the fraud has now gone (up)...and the same is likely to go even higher," the CBI said in the court filing.
PNB did not respond to requests on Tuesday seeking comment on the risk of its exposure rising further.
The bank initially reported to authorities on Jan. 29 that the jewellery groups had defrauded it of 2.8 billion rupees, or about $44 million. On Feb. 14 it said the fraud sum had reached $1.77 billion after a detailed investigation.
It raised the amount further to nearly $2 billion last week, saying it had discovered some $200 million more in fraudulent letters of credit, another form of credit guarantee, issued to Choksi's Gitanjali group.

How loopholes in PSBs' systems were flagged but never fixed until PNB fraud

Gokulnath Shetty, a middle-aged bank manager of middling rank, spent his days in the foreign exchange department on the mezzanine floor of Punjab National Bank's Brady House branch in Mumbai.
It was there, past the loan desk and up a flight of stairs, that the Central Bureau of Investigation (CBI) says Shetty hatched India's largest-ever bank fraud, which the bank values at nearly $2 billion and says was engineered between 2011 and 2017.

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The room where Shetty worked was visited on a quarterly basis by external auditors approved by the central bank, who sifted through documents but failed to spot any problem, according to interviews with two bank employees with first-hand knowledge of the department's operations.
In the three weeks since details of the alleged fraud was disclosed, Indian authorities and the media have squarely blamed Punjab National Bank, and a group of high-flying jewellers including diamond tycoon Nirav Modi.
But Reuters has uncovered new evidence that shows the Reserve Bank of India (RBI) also failed for years to either detect the fraud, respond adequately to red flags in the banking system, or correct a breakdown of normal practices at the nation's second-largest state-run bank. The RBI is in charge of supervising lenders and meant to act as the bottom-line guarantor that the banking system is sound.
That heightens worries about what other problems might lurk within India's state-run lenders, which hold some 70 percent of the sector's assets in the world's fastest-growing major economy.
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The RBI, presented with a list of findings and questions for this story sent to a spokesman, did not respond.
Punjab National did not respond to a similar request.
Shetty's lawyer, Vikram Sutaria, said his client "is not guilty".
HANDS-OFF APPROACH
Interviews with 12 current and former officials at the RBI and senior executives at some of the country's largest banks, and a review of dozens of pages of internal central bank circulars, reveal a system that in many cases had little hope of catching criminal activity.
The reporting shows:
- The RBI takes a hands-off approach: Its inspections concentrate on whether the broader systems are sound, not the details of what's happening in a particular banking operation.
- External auditors approved by the RBI, known as statutory auditors, in many cases only do top line reviews, not in-depth inspections. In Punjab National's case they have been changed regularly - 18 different firms used over seven years. Though the auditors swapped hand-off notes, no one auditor was able to delve into the bank's operations for any extended period.
- Those external auditors met with Shetty, but their audits of Punjab National published in the bank's annual reports from 2011 to 2017 did not raise alarms.
- The RBI knew by 2016 there was a laundry list of problems at Indian banks that the central bank said "exposed the bank to heightened risk of fraudulent activities".
- The central bank did not compel state banks to link their banking software with the SWIFT global interbank messaging network, a key vulnerability in the Punjab National fraud.
"SHETTY SIR"
A current senior RBI official involved in the scrutiny of banks acknowledged there were shortcomings.
"This has been going on for six years and nobody pointed it out - not the auditors and not the RBI inspection," he said.
In Punjab National Bank's initial criminal complaint, and then court documents filed in February by the CBI, deputy manager Shetty is accused of having sent letters of undertaking, essentially credit guarantees, over the SWIFT network without logging those transactions in the bank's internal software.
Two internal auditors who sat with Shetty in the branch have also been arrested, among more than a dozen people picked up by law enforcement so far.
Asked about the specifics of allegations against Shetty, who has been arrested but not charged, his lawyer, Sutaria, declined to discuss them.
The alleged beneficiaries of the transactions were companies controlled by Nirav Modi, whose diamond creations have glimmered across the flesh of film stars, and his uncle Mehul Choksi, who also owns a large jewellery operation. Neither man has been charged with a crime.
Both are currently outside the country and have denied the allegations.
Two co-workers described Shetty as a socially taciturn man who, after starting the work day by moisturizing his face and hands with Pond's cream, began sipping a seemingly endless series of cups of tea and dialling up customers on his iPhone.
Shetty, they said, declined to show others how to operate the SWIFT system.
"No one would work on SWIFT in his absence," said one of the co-workers. "Even customers used to say if 'Shetty sir' is not around let's not proceed with anything."
Representatives of Modi, the jeweller, would spend hours in the office, sometimes eating lunch there, two employees at the branch said. "It was as if they were bank employees," said one banker who still works in the currency exchange office.
AUDIT FRAMEWORK
The framework for auditing India's banks is set up to provide three levels of scrutiny: continuous monitoring by internal auditors, quarterly inspection by statutory auditors and an annual inspection by the RBI, according to interviews with officials at the central bank.
The bank's cornerstone internal, or concurrent auditors, are expected to run daily checks on all SWIFT transactions, according to RBI officials.
But a former senior RBI official with direct knowledge of the central bank's oversight of foreign exchange transactions said they often do not provide much of a backstop.
"Sometimes the concurrent auditor just blindly signs whatever is given to him without verifying what is going on," the official said.
Asked about the RBI's annual audit, a current official who previously worked in its supervision division said the central bank has moved away from doing annual branch inspections, instead relying primarily on data from the lender's headquarters.
"Earlier, the branches of banks were at least scared that RBI might catch any malpractice," the official said.
R. Gandhi, deputy governor at the RBI from 2014 to 2017, said the statutory audit process, which is carried out by private accounting firms, was not meant to be comprehensive.
"A 100 percent audit is specified only for high-risk areas," he said.
Explaining the RBI's approach overall, he added: "We are supervisors. The prime objective of RBI's audit should be to see that systems and procedures are there and those are functioning."
Two of the RBI-approved statutory auditors who inspected the Mumbai branch confirmed they met Shetty in the foreign exchange room.
One auditor, who inspected the branch on a quarterly basis between October 2011 and September 2012, said he raised the question of why Nirav Modi was getting so much credit.
The auditor, who asked not to be named, said his concerns were raised to the bank's audit committee but he was told by Punjab National executives: "Let this go this time, we will note this and take steps."
The details, he said, would have been available to RBI officials through his subsequent report, but as far as he was aware no action was taken.
Reuters called the other 16 accounting firms listed in the bank's annual report from the 2010-11 fiscal year to the most recent. The calls were either unanswered or met with refusal to discuss particulars of the audits.
WARNING SIGNS
Documents show that the RBI knew more than a year before the current scandal that there were warning signs about how Indian banks administered the SWIFT network.
Transactions such as the letters of undertaking sent by Shetty result in credit being given to a borrower in an account known as a "nostro", which is owned by the issuing bank - in this case Punjab National - but hosted by another bank overseas.
A letter on Aug. 3, 2016 from the RBI to bank executives warned of "a recent incident involving attempted unauthorized transfer of funds from the nostro account of a bank".
The RBI asked the top management of Indian banks to not only ensure that appropriate controls were in place, but also to reconcile their nostro account transactions - that is, to check that they matched their banks' internal records.
A Nov. 25, 2016 letter from the RBI listed what it described as problems that banks reported after receiving the August communication - a number of which were to show up in the Punjab National case.
Several Indian state-run banks had followed a "decentralized set up for SWIFT", meaning that multiple branches and, as a result, "significantly higher number of users" had access to sending money across the global network.
In some cases, the RBI said, that meant more than 1,000 people being able to log on, which "exposed the bank to heightened risk of fraudulent activities".
Several banks, the RBI wrote, had "no/little audit oversight on the SWIFT framework despite significant financial ramifications".
Last month, after the fraud was discovered, the reserve bank set a April 30 deadline for integrating banks' internal software and SWIFT.
Most big global banks began to connect SWIFT - originally standalone terminals like the telex machines they replaced - to their central systems in the 1990s.
Three executives with experience of the cash payments industry said this means transactions are automatically recorded and reconciled within the bank and, ideally, with counterparties. The chief executive officer of SWIFT from 1992 until 2007, Leonard Schrank, said: "I can't imagine not incorporating SWIFT payments as part of overall reconciliation."

Scam-hit PNB says it has transferred 1,415 employees since Feb 19

Scam-hit Punjab National Bank says it has transferred 1,415 employees since February 19.
Out of them, 257 are sub-staff, 437 are clerks and 721 employees are officers.
Earlier today, Reuters reported that the bank has initiated new measures where only PNB officers will be able to initiate messages on SWIFT, taking away the authority of clerks to do so.
Several new limits have been placed on the amount that officers can generate depending on their seniority in the bank hierarchy.
Read our full coverage on Nirav Modi scam at PNB

Scam-hit PNB will return to normalcy within six months, assures MD

Punjab National Bank Managing Director and Chief Executive Officer Sunil Mehta said on Friday normalcy would be restored at the scam-hit public sector bank within six months. He said the bank would not slip under the Reserve Bank of India’s prompt corrective action (PCA) even if it had to absorb the full liability of Rs 114 billion involved in the latest banking scam, in which letters of undertaking (LoUs) were fraudulently issued by PNB staff to the companies run by Nirav Modi, the prime accused in the case.
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Mehta, addressing an analysts' call that ended abruptly in less than 15 minutes, said, “We have a network of 7,000 branches, and one standalone branch cannot spoil the entire working of the big organisation set-up. The amount is big, but we have the capacity to bring it back to normalcy…maybe within six months.”
The conference call with investors was rescheduled hastily, without giving a date or any reason. The bank chief, however, was heard expressing his displeasure over the media’s access to the call.
The Delhi-based bank’s chief said it had sufficient capital in accordance with the regulatory requirements, and reiterated that the amount of liability would depend on the investigation.
“On a hypothetical basis, even if all the liability devolves on us and the regulator finds that no other bank is at fault and we have to meet the liability, then, in the worst case scenario, we will still not breach the regulatory capital requirements,” Mehta said. The bank’s common equity tier-I stood at 8.05 per cent against a minimum of 5.5 per cent required to be maintained in accordance with the Basel-III global capital adequacy norms.
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Business Standard has learnt that the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI) will not investigate other banks with an exposure to loans through fraudulent LoUs. “The investigation remains focused on PNB. Other banks will be looked into only if they allege fraud and approach investigating agencies,” an official said.
Mehta said the bank would breach the non-performing assets (NPA) levels but that would not trigger PCA action from the RBI. He clarified that the LoU fraud was an outstanding exposure and the liability attached to the rollover of the LoUs, which were being issued since 2011, would not be part of the bank’s cumulative exposure. “Rollover is not included. It is purely outstanding letters of credit,” he said. The bank chief said it had not received any advisory from the RBI as of now, and added the bank regulator was assessing the situation at present.
The bank will undertake multiple audits, including forensic audit, and take steps such as the monetisation of its non-core assets to get out of the mess. It is also considering expediting the sale of some of its fixed assets, including a few office buildings not in use presently, for about Rs 5 billion by March-end, a PTI report said quoting sources.
ALSO READ: PNB fraud: What India's biggest sham transaction means for banking sector?
Mehta said, “We will mitigate the people-related risk and create better checks and balances so that it doesn’t occur in future.
Bank has a lot of resources, including non-core assets. We are working on a strategy on how shortly we can come out of this situation,” Mehta said.
On the advice of the ED, the external affairs ministry has suspended the validity of passports of Nirav Modi and Mehul Choksi, accused of involvement in the scam, for four weeks.
PNB has suspended eight more officials, including one at the general manager level, for their suspected involvement in the alleged scam, a senior government official said. The official also said PNB would repay other banks their dues by March 31 and would be funded from its internal resources.
State Bank of India Chairman Rajnish Kumar told reporters in Kochi it had exposure on PNB as the former had lent $212 million to Modi on the basis of LoUs issued by the latter, according to PTI.
ALSO READ: Rs 114-bn PNB fraud happened due to failure of internal controls: RBI
A junior branch official fraudulently issued LoUs since 2011 on behalf of firms belonging to the Nirav Modi group — Solar Exports, Stellar Diamonds, and Diamonds R Us — for availing of buyers’ credit from overseas branches of Indian banks, including Allahabad Bank, SBI and Axis Bank. The PNB employees, involved in the alleged scam, did not record the transactions in the bank’s core banking system because of which it was undetected.
“One of the risk management practices that we follow is job rotation. We don’t keep a person for more than three years at one position. There are certain positions which are very sensitive and we monitor those positions very closely,” Kumar said, adding the bank’s international financial communication system SWIFT and core banking system were integrated.
On Friday, the ED issued summons for appearance to Nirav Modi and Mehul Choksi, officials said. They said both Modi and Choksi were summoned under the Prevention of Money Laundering Act (PMLA) and asked to depose within a week. The notices were handed over to the directors of the firms of the two businessmen as they were not in the country. ED sources said the process to attach the immovable properties of Modi and Choksi would begin, and more raids and some arrests might take place in the coming days.
ALSO READ: Fraud-hit PNB looking to sell real estate assets worth Rs 50 bn: Source
According to the established norms, none of the properties attached or jewellery seized can be used by PNB to recover its losses from this fraud, an ED source said. “These now become the property of the government of India, through courts. If any sale takes place, the proceeds go to the consolidated fund of India,” said the source. A core team of 20 ED officials has been formed, across cities, to work on the case.
Read our full coverage on Nirav Modi scam at PNB

NPA rules and Rs 110-bn fraud can put one-fourth of PNB's net worth at risk

Shares of Punjab National Bank (PNB) fell almost 10% on Wednesday due to the twin negative news. While the new framework on non-performing assets (NPA) resolution, announced by the Reserve Bank of India (RBI) on Monday night, could mean higher loan provisioning going ahead for the banking industry.
Also, PNB on Wednesday said that it had detected fraudulent and unauthorised transactions at one of its Mumbai branches. The value of the fraudulent transactions is $1,771.69 million (or Rs 110 billion). The stock reaction thus is not surprising as the bank’s profit and overall asset ...
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