Reserve Bank of India (RBI)
governor Shaktikanta Das came
under pressure at the bank’s board meeting last week, with two external
directors questioning how a string of frauds that have surfaced
since
2018 remained undetected for years.
The two board members referred to the losses suffered by Punjab
National Bank, which bankrolled jeweller Nirav
Modi and his uncle Mehul Choksi; the multiple
irregularities in IL&FS, which came to light after the firm
defaulted on payment obligations; and the recent failure of Punjab
& Maharashtra Coop (PMC) Bank — 70% of whose loan book was cornered
by Mumbai-based realtor HDIL.
“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
person aware of the discussions told ET.
“Perhaps, it wasn’t an entirely fair
question, but it was apparent that the RBI officials felt awkward. Maybe
it was not expected,” said the person.
The spokesman for RBI declined to comment on board deliberations.
Questions on RBI’s Supervision Mechanism
The stress faced by Yes Bank also figured in the course of the discussions, said another source.
The external directors raised the issue
at a time when the banking regulator is facing flak on social media, and
facing the ire of depositors and financial market commentators.
Questions have cropped up on the efficacy of its
inspection and supervision mechanism.
In the PNB as well PMC Bank episodes,
some officials exploited the gaps in systems to keep the regulator in
the dark about a sizeable part of their exposures. According to sources,
PMC Bank used a “middle server” to manipulate data and convert the
information in the bank’s core banking system
(CBS) to hide information. “The data engagement between the RBI and
cooperative banks is much less compared with scheduled commercial
banks.”
The frequency is low, the format is
loose and information can be sent via emails, unlike commercial banks
which directly upload the data to the RBI in a specified format. No
commercial bank could have done this simply because
there is so much duplication of data. A fraud like this would have been
immediately spotted,” said the senior compliance officer at a local
bank.
Typically, the data collected from the
CBS of a bank is pooled into a centralised data mart that automatically
generates reports which are then shared with the RBI. “It appears, there
was a parallel or another data mart in PMC
Bank that was used to fudge information. It’s a complex operation, and
difficult to believe that a handful of officials could have pulled it
off,” said the person.
PNB’s exposure to Nirav Modi escaped
regulatory scrutiny as the bank’s SWIFT system — the global financial
messaging service — was not integrated into its CBS. In fact, the RBI
later found that SWIFT-CBS integration was missing
in many other banks. A handful of PNB officials had used the SWIFT
network to issue unauthorised letters of undertaking (LoUs) — a
quasi-guarantee from a bank — to raise finance abroad.
Ever since IL&FS collapsed a year
ago, the role of RBI and auditors has come under intense scrutiny. Even
though the regulator had flagged the inter-group exposure in IL&FS
Financial Services, the group’s nonbanking finance arm,
the company found ways to evergreen loans, preserve credit rating and
continue borrowing.