The aftershocks of the Rs 11,500-crore fraud at Punjab National Bank (PNB), involving billionaire diamond merchant Nirav Modi, have hit the banking industry exposing glaring loopholes in regulatory and auditing mechanism. The fact that the fraudulent Letters of Undertaking (LoUs), issued by a few errand bank officers bypassing the formal banking reporting system, went undetected for seven years points to a complete breakdown of the supervisory system. The fake LoUs were issued from a single PNB branch in Mumbai in favour of a clutch of diamond companies linked to Modi and his relatives. This fraud allowed them to borrow loans in foreign currency from overseas branches of other Indian state-owned banks. There are fresh worries that similar scams may be lurking in other banks, which still remain under the radar. This is probably the largest banking scam in the country. It reflects very poorly on the functioning of the audit committees of the banks. The Reserve Bank of India also cannot escape the responsibility as it is supposed to keep a close watch on the loans that have turned substandard or are on the verge of default. A full-scale investigation must be carried out into the fraud to bring all the culprits to book. There is an urgent need to overhaul the banking auditing and monitory systems to prevent such frauds in future. It is deplorable that the political parties lost no time in resorting to a blame game instead of working collectively to fix the systemic flaws.
The BJP and the Congress have been blaming each other for encouraging crony capitalism and allowing a huge pile of non-performing assets (NPAs) to accumulate in the banks. The NDA government had last month unveiled a plan to infuse about Rs 1 lakh crore into 21 capital-starved public sector banks this financial year. Of this, Rs 5,473 crore is planned to be injected into PNB, the country’s second-largest public sector bank. As a result of the latest fraud, the PNB’s capital adequacy ratio will be severely dented. It is clear that some employees of the bank colluded with fraudsters and routed large transactions for the borrowers by circumventing the core banking solution. The tainted officials did not make any entry about the LoUs in the bank’s central database to evade detection. They allegedly transmitted messages to the overseas branches of other Indian banks to honour the fake LoUs for settlement of import bills on the beneficiaries’ behalf. In what has now become a familiar pattern in high-profile cases, the CBI’s FIRs came too late in the day after scamsters quietly fled the country The RBI must probe the systemic lapses thoroughly and fix accountability in order to restore public faith in the banking system.