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RBI governor faces board queries on financial frauds

Losses suffered by PNB, irregularities by IL&FS, PMC bank were some of the issues Das was confronted with.

, ET Bureau|
Updated: Oct 16, 2019, 08.55 AM IST
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Ever since IL&FS collapsed a year ago, the role of RBI and auditors has come under intense scrutiny.
MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das came under pressure at the bank’s board meeting last week, with two external directors questioning how a string of frauds that have surfaced since 2018 remained undetected for years.

The two board members referred to the losses suffered by Punjab National Bank, which bankrolled jeweller Nirav Modi and his uncle Mehul Choksi; the multiple irregularities in IL&FS, which came to light after the firm defaulted on payment obligations; and the recent failure of Punjab & Maharashtra Coop (PMC) Bank — 70% of whose loan book was cornered by Mumbai-based realtor HDIL.

“These incidents differ from each other and are not exactly related, but a few members were quite vocal about it. The governor explained the information-sharing system and collection of data by the RBI… In some cases, the data itself — even the audited numbers — were either inadequate or fudged,” a person aware of the discussions told ET.

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“Perhaps, it wasn’t an entirely fair question, but it was apparent that the RBI officials felt awkward. Maybe it was not expected,” said the person.

The spokesman for RBI declined to comment on board deliberations.

Questions on RBI’s Supervision Mechanism
The stress faced by Yes Bank also figured in the course of the discussions, said another source.

The external directors raised the issue at a time when the banking regulator is facing flak on social media, and facing the ire of depositors and financial market commentators. Questions have cropped up on the efficacy of its inspection and supervision mechanism.

In the PNB as well PMC Bank episodes, some officials exploited the gaps in systems to keep the regulator in the dark about a sizeable part of their exposures. According to sources, PMC Bank used a “middle server” to manipulate data and convert the information in the bank’s core banking system (CBS) to hide information. “The data engagement between the RBI and cooperative banks is much less compared with scheduled commercial banks.”

The frequency is low, the format is loose and information can be sent via emails, unlike commercial banks which directly upload the data to the RBI in a specified format. No commercial bank could have done this simply because there is so much duplication of data. A fraud like this would have been immediately spotted,” said the senior compliance officer at a local bank.

Typically, the data collected from the CBS of a bank is pooled into a centralised data mart that automatically generates reports which are then shared with the RBI. “It appears, there was a parallel or another data mart in PMC Bank that was used to fudge information. It’s a complex operation, and difficult to believe that a handful of officials could have pulled it off,” said the person.

PNB’s exposure to Nirav Modi escaped regulatory scrutiny as the bank’s SWIFT system — the global financial messaging service — was not integrated into its CBS. In fact, the RBI later found that SWIFT-CBS integration was missing in many other banks. A handful of PNB officials had used the SWIFT network to issue unauthorised letters of undertaking (LoUs) — a quasi-guarantee from a bank — to raise finance abroad.

Ever since IL&FS collapsed a year ago, the role of RBI and auditors has come under intense scrutiny. Even though the regulator had flagged the inter-group exposure in IL&FS Financial Services, the group’s nonbanking finance arm, the company found ways to evergreen loans, preserve credit rating and continue borrowing.

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