India gives state-run lenders 15 days to improve oversight after fraud at Punjab National Bank

A man leaves an automated teller machine facility of Punjab National Bank in New Delhi on Feb 27, 2018.
A man leaves an automated teller machine facility of Punjab National Bank in New Delhi on Feb 27, 2018.PHOTO: REUTERS

MUMBAI (REUTERS) - India's Finance Ministry set a 15-day deadline on Tuesday (Feb 27) for state banks to take action to improve their oversight of operational and technological risks after the country's second-biggest state lender was hit by a US$2 billion (S$2.6 billion) fraud.

The directive did not mention Punjab National Bank (PNB), but comes after the lender said on Monday that the amount of fraudulent transactions suffered could rise by US$204 million, in addition to the US$1.77 billion earlier reported.

The news sent PNB shares reeling to a 20-month low.

PNB's announcement late on Monday also sent shares of other state-run lenders lower, reinforcing concerns about the escalating financial cost of the unauthorised loans steered towards billionaire jewellers Nirav Modi and his uncle Mehul Choksi, owner of Gitanjali Gems.

The scale of the fraud, the biggest to hit an Indian lender, has stunned the country and put the lack of supervisory oversight by PNB's own officials, as well as the central bank and auditors under the spotlight.

The fraud has also sparked aggressive investigations by the country's authorities, including a raid last week of Mr Modi's former law firm that lawyers described as unprecedented.

Mr Rajeev Kumar, the top bureaucrat in the Department of Financial Services, said in a Twitter message that the government expected state-run lenders "to take pre-emptive action and identify gaps/weaknesses" for potential operational and technological risks within 15 days.

 

Mr Kumar also posted a notice from his department with a list of expected action by the lenders, including identifying current oversight weaknesses, preparing a report on how to improve practices and standards, and directing the banks' boards "to assign clear accountability" for implementation and compliance.

Last week, Finance Minister Arun Jaitley, also without mentioning the PNB case, decried a "lack of ethics" among sections of Indian business and criticised inadequate oversight by auditors and regulators.

Worries about the lack of supervision in India's banking sector have been compounded after state-run Oriental Bank of Commerce said on Sunday it had suffered losses of around US$17 million over loans provided to a sugar company that the lender claims was fraudulently diverted.

Meanwhile, pen maker Rotomac Global is facing a police investigation over accusations it cheated a consortium of lenders, while private lender City Union Bank has said this month that "cyber criminals" had hacked its systems and transferred nearly US$2 million via the SWIFT financial platform.

Analysts said the government directive could hit banks in the short-term if more fraud is detected, though it would benefit the sector in the long-term.

"The oversight in the banking system is obviously not good,"said analyst Yuvraj Choudhary at brokerage Anand Rathi.

"This could lead to uncovering of more potential scams. We can expect bottomlines to be hit in the coming quarters."

LAW FIRM RAIDED

Meanwhile, various Indian authorities have stepped up investigations into potential wrongdoing at PNB as well as companies tied to Mr Modi and Mr Choksi, although no charges have yet been filed.

An official at the Central Bureau of Investigation (CBI) said the country's federal police had raided the offices of law firm Cyril Amarchand Mangaldas last week, which had represented Mr Modi for a while, and taken away documents related to the Indian jeweller. He did not give additional details.

Lawyers said they were unclear what legal basis the CBI had used to seize the documents.

Mr Cyril Amarchand did not respond to a request for comment.

At least a dozen people - six from the bank and six more from Mr Modi's and Mr Choksi's companies - have been arrested, while investigators have seized a number of properties from the two, including jewellery and luxury vehicles.

Both Mr Modi and Mr Choksi, whose whereabouts are unknown, have said they are innocent.