PNB may have to pay Rs 113 bn to banks in fraud involving Nirav: Report

In a recent development in one of India's biggest banking scams, the Reserve Bank of India (RBI) has directed Punjab National Bank (PNB) to pay the entire Rs 113 billion to other banks, says a report.

PNB on Wednesday made a startling revelation that it had detected a colossal fraud worth Rs 113 billion in one of its Mumbai branches. Sources from the RBI have told Economic Times that the central bank has made its stand clear in the alleged fraud involving jeweller Nirav Modi.

"RBI has made their stand very clear that PNB is liable to pay dues to peer banks. If PNB does not pay up, it will lead to double provisioning-- both PNB and 30 other banks will have to provide for the huge loss," said officials familiar with the development.

In a letter to 30 banks, PNB said the other banks had violated RBI norms. "Letters of the undertaking were opened in favour of overseas branches of Indian banks for import of pearls for one-year period as against the RBI guidelines that stipulate only 90-day timeline from date of shipment. This 90-day timeline stipulated has been overlooked by overseas branches of Indian banks," the letter read.

While other banks have rejected PNB's allegations, the stressed bank has categorically refused to pay back.

What choice does PNB have?

"The RBI has stated that even in cases where an employee commits a fraud, the bank is liable to honour any commitment that arises as a consequence of the fraud. So PNB cannot avoid this responsibility," a banker told ET.

Failure of RBI inspection

The $1.8 billion fraud at PNB shows the failure of various kinds of audits in the bank, including the RBI's inspection, said a senior chartered accountant.

According to him, the Reserve Bank of India has to carry out a deep investigation, forensic audit of the accounts involved in the alleged fraud and also make it compulsory for the banks to carry out the forensic audit.

"Broadly the kinds of audits or inspections that are carried out in Indian banks are statutory audit (carried out by auditors appointed by the banks), concurrent audit (carried out by outside auditors at the bank branches), internal audit (carried out by bank staff) and the inspection by RBI," P S Prabhakar, Partner in Rajagopal and Badrinarayanan, a chartered accountancy firm, told IANS.

He said the statutory auditor is mainly a test check auditor or an audit where transactions are checked at random.

"The internal audit is done by bank staff. Then there is also inspection by RBI officials. It is strange how the fraudulent transactions that have been carried out since 2011 were not detected," Prabhakar said.

Normally large value transactions should be checked and SWIFT system transactions should be carefully checked, he added.