Shaktikanta Das faces board heat on RBI's inability to detect financial frauds

Reserve Bank of India (RBI) Governor Shaktikanta Das came under duress at the apex banks' board meet last week, as two external directors questioned the apex bank as to how a series of scams that came to light since 2018 remained unnoticed. The two directors cited the Punjab National Bank (PNB) fraud, the IL&FS scam and the very recent Punjab & Maharashtra Co-operative (PMC) Bank case.

"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 source told the Economic Times. The source in the know of the proceedings added: "Perhaps, it wasn't an entirely fair question, but it was apparent that the RBI officials felt awkward. Maybe it was not expected."

The pressure faced by Yes Bank also came about during the RBI's board meet. The external directors raising the issue comes at a time when the RBI is facing a lot of flak over its inspection and oversight mechanism efficiency.

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In the case of PNB and PMC Bank, some officials took advantage of loopholes in the system to keep the RBI in dark regarding a substantial share of their exposures. In the PNB episode, the bank's exposure to Nirav Modi escaped regulatory check as its SWIFT system (global financial messaging service) was not embedded into the bank's core banking system (CBS).

As a matter of fact, the RBI later discovered that SWIFT-CBS systems were not integrated in case of several other banks as well. Many PNB officials had manipulated the SWIFT network to issue unauthorised letters of undertaking (LoUs) (a quasi-guarantee from a bank) to secure overseas financing, the report added.

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The role of auditors has also come into question after the fall of IL&FS a year ago. Despite the apex bank flagging the inter-group exposure in IL&FS Financial Services, the NBFC kept evergreening loans, maintained credit rating and continued taking loans.

The PMC Bank scam came to light last month when it was discovered that the bank created over 21,000 fictitious accounts, some in the names of dead people, to hide bad loans extended to almost-bankrupt Housing Development and Infrastructure Limited (HDIL). According to its former MD Joy Thomas, the lender has an exposure of Rs 6,500 crore to HDIL.

The bank provided loans to the embattled HDIL and its subsidiaries despite being aware of the dismal financials of the company. After the matter came to light last September, the RBI imposed operational restrictions on the lender.

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