Quite often animals or even the birds are the first to warn humans of an approaching earthquake. Financial markets, too, have many soothsayers. Raghuram Rajan, the celebrated economist, actually predicted the global financial meltdown of 2008 much before it created havoc with the world economies. The world is still struggling to recover from that shock. Globally regulators are the best masters to give signals of a financial catastrophe but seldom do players heed their wisdom.
The state-owned Punjab National Bank, too, looks to be a victim of turning a blind eye to the crises that was brewing at its backyard for many years. The fraudster Nirav Modi was using the bank's letter of undertakings (LoUs) and a SWIFT messaging system (not linked to their core banking) to get access of funds from the overseas branch of other Indian banks. PNB as an issuing authority of LoUs is now in the soup as it has to honor all the financial obligations as Modi is absconding.
The Reserve Bank of India's Deputy Governor SS Mundra, who retired last year, was the first to speak publically about the possible cracks in the banks payment infrastructure. In September 2016, almost 18 months ago, Mundra disclosed that the RBI has come across instances of fraudulent messaging confirming documentary credits being transmitted using the SWIFT infrastructure. The cases may have been minor, but the issue was very sensitive as the system was compromised in some cases.
Mundra said although the latter incidents were mainly a result of failure of internal controls and non-adherence to four eyes principles (by banks), it is also on account of reliance on disparate systems whereby SWIFT transactions could be done without originating a corresponding transaction in the core banking solution(CBS). This is exactly took place in the PNB case where the transactions effected over SWIFT system were not captured in the core banking solution.
Mundra, who was earlier the CMD of Bank of Baroda, also narrated an incident where an attempt was made on a commercial bank in India by generating fraudulent payment instructions on the Nostro accounts and transmitting them over SWIFT messaging system. "Though monetary loss could be prevented with proactive follow up with the concerned paying intermediary banks, the incident has reinforced the fact that the various stakeholders have not learnt the lessons yet," said Mundra bluntly.
Globally, the SWIFT system is already under attack from cyber criminals. Recently, the Central Bank of Bangladesh came under attack from cyber criminals when they successfully manage to withdrew almost $81 million from their account in the US Federal Reserve Bank.
Later, SWIFT also admitted that there was some tempering of SWIFT messaging system at the central bank of Bangladesh.
In the PNB case, the bank is putting the blame on its employees. Tomorrow, some cyber criminals could attack Indian banks' SWIFT messaging system, the way it happened with the Central Bank of Bangladesh. All these banks have transactions globally with MNC banks. These transactions have to be honored at any cost. Faster the banks especially PSBs realize this, better it is for the financial system.