Rs 14,000 crore PNB fraud: Was misled on Nirav Modi scam, says RBI

Reserve Bank of India admitted to a parliamentary panel that it was fed with incorrect compliance reports in the Rs 14,000 crore Nirav Modi scam. It said in a written response to the Parliamentary Standing Committee on Finance that the blame for the fraud lay on the Punjab National Bank’s Board for allowing the letter of undertaking (LoU) scam to continue for years. During this period,  money was being pilfered out of the bank’s swift system without any checks, the house panel was told.

“PNB furnished a compliance report which turned out to be factually incorrect,” RBI said in a written reply to the panel’s query on the LoU scam. The first official response from RBI on the fraud came on February 16 when it said that “the fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls.”

The risk management systems in PNB had failed, and the scam was going on for a while in the Brady House branch of PNB the panel was informed. The apex bank also said that it does not have the bandwidth to supervise 1,16,000 branches in the country.

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It told the panel that enterprise wise, risks of the bank were to be managed under three lines of defence all of which had failed. The first line of defence is the ability of managing the risk, being close to the risk taking activity, primarily responsible and accountable for assessing and controlling the risk arising from their own acts. The second line of defence is the risk monitoring function that specialises in overseeing the risk and the third line of defence should have been the audit functions. RBI said ‘in case of PNB there seems to have been failure of all the three lines of defence resulting in perpetration of such a large value fraud.”

By Manju AB, DNA India