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PNB-Nirav Modi fraud case: RBI cautioned banks against SWIFT misuse thrice since August 2016

The statement from RBI comes hours after Finance Minister Arun Jaitley said that the PNB scam was a result of a failure of management and auditors.

Reported by: India TV Business Desk, New Delhi [ Updated: February 20, 2018 20:35 IST ]
PNB-Nirav Modi fraud case: RBI cautioned banks against SWIFT misuse thrice since August 2016Photo:PTI

Reserve Bank of India on Tuesday said that is has been issuing necessary instructions to banks from time to time on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks. 

The central bank, which has been asked by the Finance Ministry to explain the reasons for banking system failure in the massive PNB-Nirav Modi scam worth Rs 11,400 crores, said that it had confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences.

Banks have, however, been at varying levels in the implementation of such measures, RBI said in a press statement issued on Tuesday. 

The statement from RBI comes hours after Finance Minister Arun Jaitley said that the PNB scam was a result of a failure of management and auditors. 

“When authority is given to the management then you are expected to utilize authority effectively and in the right manner and therefore question for management is if they were found lacking, on the face of it seems they were,” Jaitley said while addressing the annual meeting at the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP). 

Also read: Both internal, external auditors failed to detect fraud, CA professionals must introspect, says Arun Jaitley

In response, the RBI today reiterated its confidential instructions and mandated the banks to implement, within the stipulated deadlines, the prescribed measures for strengthening the SWIFT operating environment in banks. 

Furthermore, in view of the rising incidence of frauds in the Indian banking system, the central bank has decided to constitute an Expert Committee under the chairmanship of YH Malegam, a former member of the Central Board of Directors of RBI. 

The committee will look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and the steps needed to prevent it; factors leading to an increasing incidence of frauds in banks and the measures (including IT interventions) needed to curb and prevent it; and the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and frauds. 

Also read: CBI questions 10 bank officials, 18 employees of Nirav Modi and Gitanjali group

Here's the full text of the press statement issued by Reserve Bank of India on PNB fraud: 

Reserve Bank of India (RBI), as part of its ongoing efforts for the strengthening of the supervisory framework in the country, has been issuing necessary instructions to banks from time to time on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks. 

1. The risks arising from the potential malicious use of the SWIFT infrastructure, created by banks for their genuine business needs, has always been a component of their operational risk profile. 

RBI had, therefore, confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016, advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences.

Banks have, however, been at varying levels in the implementation of such measures. 

2. In the wake of SWIFT-related fraud involving significant amount, reported recently by Punjab National Bank, RBI has today reiterated its confidential instructions and mandated the banks to implement, within the stipulated deadlines, the prescribed measures for strengthening the SWIFT operating environment in banks. 

3. Further, in view of large divergences observed in asset classification and provisioning in the credit portfolio of banks as well as the rising incidence of frauds in the Indian banking system, it has been decided to constitute an Expert Committee under the chairmanship of Shri Y H Malegam, a former member of the Central Board of Directors of RBI, to look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and the steps needed to prevent it; factors leading to an increasing incidence of frauds in banks and the measures (including IT interventions) needed to curb and prevent it; and the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and frauds. 

4. The members of the committee will be: Shri Bharat Doshi, Member, Central Board of Directors, RBI; Shri S Raman, former Chairman and Managing Director, Canara Bank and former Whole-Time Member, SEBI; and Shri Nandkumar Saravade, Chief Executive Officer, Reserve Bank Information Technology Pvt Ltd (ReBIT). Shri A K Misra, Executive Director, RBI will be the Member-Secretary of the committee.

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