PNB fraud fallout: State-owned bank officials attend risk management workshop

In the wake of the Rs 13,000 crore PNB fraud, this week saw senior officials of all public sector banks meeting up in the capital for a three-day workshop. Attended by the chief technology officers, chief risk officers and executive directors of the state-owned banks, the workshop's agenda was to reportedly look at the existing risk management mechanism in place and figure out ways to strengthen it by adopting best practices. The meeting came about as a result of the finance ministry's February 27 directives to the public sector banks (PSBs) to come out with a pre-emptive action plan within 15 days to identify gaps and gear up in tackling operation and technological risks.

Addressing the media after the workshop, M.S. Sastry, deputy managing director and chief risk officer, State Bank of India, said that the banks have drawn up action plans to "to further strengthen the controls in the areas of trade finance, SWIFT, credit risk, operational risk besides cyber and IT risks". He added that the formulated plans will now be submitted before the respective boards and will be implemented by all banks "in three to six months".

For instance, according to The Business Standard, PSBs will now discourage multiple banking arrangements for large loans since the banks involved are not aware of the transactions that take place between the borrower and other lenders. "In case of multiple banking arrangements there is no discipline. There will, preferably, be consortium lending for loans above Rs 2.5 billion [Rs 250 crore]," Sastry told the daily, adding that all existing accounts with exposure of above this ceiling will also be moved to consortium lending. The latter is expected to facilitate better control and coordination since there will be common documentation and collateral, plus the cash management facility will be entrusted to one bank in the consortium.

The report added that PSBs have decided to tighten lending to corporates by asking promoters to give equity upfront while the quality of equity will be assessed by verifying the loss absorption capacity of firms. Significantly, PSBs will also deter from funding the interest during the construction period.

Another key decision taken at the workshop was to integrate SWIFT with the core banking system (CBS) latest by April 30 this year. CBS refers to system where all branches are inter-connected and all the transactions are updated real-time. However, the PNB officials - who fraudulently issued the LoUs - had bypassed the CBS and used a messaging system called SWIFT, which was not integrated with it. A senior bank executive told the daily that currently only 3-4 PSU banks, out of 21 in total, have fully integrated SBS with SWIFT.

Sastry added that further controls have now been put in place that includes additional layer of approval for all outward SWIFT messages and restricting such transactions to bank business hours. Moreover, each bank will not only establish Onsite Cyber Security Operation Centre (C-SOC) to monitor all the IT systems but will also bring all software applications under the control of corporate centre of its IT department to ensure there is no misuse of system.

Another point in the action plan is to organise branch-level risk awareness workshops at PSBs to create awareness among employees. Banks will not only henceforth strengthen their 'know your employees' systems, but reportedly also encourage whistleblowing.

According to R.K. Gupta, executive director, Bank of Maharashtra, these revised processes are robust and will go a long way in checking fraud.

(With PTI inputs)