How PNB $2 billion scam exposes the biggest flaws in the Indian banking system

The PNB branch manager who handled Nirav Modi’s account was in the same position for 7 years & handled one account all those years.

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KOLKATA: Amid the blame game between Punjab National Bank (PNB) and other affected lenders in the Rs 11,300-crore scam, the elaborate web of deception has served to expose the biggest flaws in the Indian banking system – weak risk management practices and glaring over sight lapses.
While international banks tightened supervision and corporate governance after the subprime credit crisis in 2008, most Indian banks appear to have remained laggards.
Doubts are now being raised in several quarters as to how PNB officials at Mumbai’s Brady House branch continued to issue letters of undertaking (LoU) against import receipts from Nirav Modi and his firms for seven long years without attracting management supervision. Overseas branches of other lenders such as Axis Bank or Allahabad Bank issued buyers’ credit against these LoUs. The money has been credited into the Nostro account of PNB's branch.
Nostro account refers to an account that a bank holds in a foreign currency in another bank. PNB had honoured the claims until January 5, but has now dubbed these transactions as fraudulent. “We will honour all our bonafide commitments,” PNB chief Sunil Mehta said on Thursday in his first interaction with the media after the scam became public.

“If these LoUs are fake, how did PNB honour the claims all these years?” asked a veteran bank executive who headed three banks in the past. “It is difficult to believe that the knowledge of malpractices remained confined to a handful of people. It demonstrates the failure in management supervision,” he said.

Nostro accounts in banks nowadays are being reconciled real time. And all branches authorised to deal in foreign exchange would know the details of such accounts.
“When frauds with a similar design happen on a repetitive basis, it becomes a matter of concern. It is regrettable that frauds based on letters of credit, supporting fake transactions of purchases, have happened in the past in the jewellery sector,” said Vinod Kothari, a senior chartered accountant. “Banks’ internal controls need to be strengthened. Fraud protection is essentially a duty of the bank,” Kothari said.
According to the Central Vigilance Commission rules, organisations and their chief vigilance officers are mandated to identify people working in sensitive positions and ensure that they get transferred every two/three years. International banks require their officers to go on vacation when peer review is conducted: Indian banks haven't adopted such practices yet.

The PNB branch manager in question was in the same position for about seven years until he retired in January and handled one account for all these years, underscoring the lacunae in risk management and oversight functions at Indian lenders.
“Most Indian banks do not follow this rule,” said a senior banker who was earlier worked as CVO.