The Reserve Bank of India (RBI) on Tuesday blamed Punjab National Bank (PNB) of the $2-billion Nirav Modi-Mehul Choksi fraud, and accused the state-run lender of furnishing “factually incorrect” compliance reports.
“As regard for the LoUs (letters of undertaking) issued for years without collateral by the PNB branch (in Mumbai) which went unnoticed, it is pertinent to recognise that primary responsibility for understanding the risks undertaken by a bank and ensuring that the risks are appropriately managed through necessary risk mitigants, controls, etc, clearly rests with the board directors of the bank concerned,” the regulator told a Parliamentary Standing Committee when RBI governor Urjit Patel appeared.
The RBI also contended that SBI and other nationalised banks were not “banking companies” defined by the Banking Regulation Act and they were governed by other laws. It then listed nine powers that it lacked, including the mandate to appoint and remove public sector bank chiefs, license them, convene a meeting of their boards or supersede the board. Further, the RBI said it did not have powers to order voluntary amalgamation or winding up or seek the Centre’s help for suspension of a state-run bank’s business and preparation of a restructuring plan.
Also read: The UK agrees to help India in locating the fugitive diamond merchant
The statement is expected to set the stage for a fresh battle with the finance ministry, which had questioned similar claims made by Patel earlier. Finance ministry officials have maintained that it only had powers to appoint and remove bank chiefs, which was also done in consultation with the Banks Board Bureau and the RBI.
In its submission to the Parliamentary panel, the RBI said it has suggested amendments to the law to empower the central bank to exercise “effective control” over public sector banks, as it did with the private players, on “an ownership-neutral basis”.
On the issue of fraud at PNB, the RBI’s detailed response said a bank’s risks were expected to be managed under three lines of defence. The first, it said, were the officials performing the line functions to assume, own and manage risks.
As an independent media platform, we do not take advertisements from governments and corporate houses. It is you, our readers, who have supported us on our journey to do honest and unbiased journalism. Please contribute, so that we can continue to do the same in future.
