With the case of mega scam by State-owned Punjab National Bank (PNB) getting intensive day by day, the Government is likely to direct all banks and non-banking financial institutions (NBFCs) to tighten credit exposure norms for overseas loans. The move is aimed to monitor the huge loans offered by banks to their premium customers who are generally involved in the export-import businesses abroad. It is also expected that the issue of bank’s credit exposure norms as well as frequency of issuing letter of undertaking or loUs may come in the Cabinet for discussion to be held on Tuesday.
The move of the Government came at a time when overseas branches of banks got exposed when they credited Rs 11,300 crore to the Nostro account of the PNB. The issue came to light when the PNB refused to honour the loU of Rs 2,200 crore, which fell due on January 24, 2018, to Allahabad Bank. There are 147 loUs, issued by PNB, starting March 2017, will mature by March 2018.
Sources in the Finance Ministry told The Pioneer that no doubt, PNB multi-crore fraud is an eye-opener not only for the banking sector but for all financial institutions in the country. The loU has taken the centrestage in this scam. The Government will ask the RBI to direct banks to tighten credit rules for overseas loans of their customers. Besides, RBI also needs to ensure us for cutting the credit exposure to select companies whose books are under suspicion, they added.
The Centre also blamed the RBI for the fraud by ignoring its risk management system of the bank which is in place to monitor all such activities.
“The PNB risk management system may come under close scrutiny from the RBI for laxity in the SWIFT messaging system and non-reconciliation of Nostro account balances to detect the reported fraud,” sources added.
However, a senior PSU bank official said, “The RBI has failed to monitor all Nostro accounts to some extent for which such scam occurred. All banks report their foreign exchange (Forex) details to the bank in March and September every year. How come the RBI did not notice the forex transaction details when PNB filed the report to the central bankIJ”
Generally SWIFT, which stands for Society for Worldwide Inter-Bank Financial Telecommunication, is just like the IFSC code in the inter-bank domestic transfers. They are used for inter-bank international money transfers and messaging. In fact, the banks are identified with the alphanumeric SWIFT code. And Nostro accounts hold deposits made by customers in one country before being transferred to the primary due from account held by the business in their home nation, in their home currency. These accounts generally hold funds in the currency native to the account’s location and not the currency of the business’ home nation or bank.
In the present case, the overseas branches of other banks got the information about the bank fraud from the SWIFT messaging from the PNB. “How a message in SWIFT goes undetected with huge amount. The duly auditing of a SWIFT messaging would have easily raised a red flag,” sources added.
The undue issuance of loUs without checking facts and details of individuals or entities by the bank’s management has derailed the whole banking system and lost the public trust on other banks as well. All loUs issued by any bank in India has a window of 90 days and it is to be reported to the RBI on a quarterly basis. “Why is it that when the first loU was issued way back in 2011, without entering into the core banking system (CBS), it was ignored by the RBI and the PNB top management despite the amounts being so huge,” sources said.
These two key elements - Swift and Nostro - are at the heart of over Rs 11,000 crore fraud, as claimed by the PNB, perpetrated by its customer Nirav Modi to whom the loU were issued by the PNB. The loUs were issued by the PNB to the branches of half a dozen other banks based on which the funds were transferred to the PNB’s Nostro account. The PNB later realised that the documents submitted by Nirav’s firms were not in order.
A Nostro account is typically opened by a domestic bank, in this case PNB, with overseas banks and the account is used to make payment to overseas parties for imports, such as for rough diamonds in the present instance. A domestic bank typically facilitates creation of such Nostro accounts with overseas banks so that it is able to pay dollars from the overseas account for imports by its local client.
In early 2013, a clutch of public sector banks formally made a representation to the RBI expressing a lot of difficulty in either eliminating or reconciling the proliferating number of entries in their accumulating Nostro accounts after a lapse of time.
So, when banks told the RBI in 2013 that it was becoming difficult to eliminate or reconcile the burgeoning Nostro accounts, the central bank specifically advised that public sector banks should minimise the number of Nostro accounts to have a better control over reconciliation.