PNB fraud

Punjab National Bank's Brady House branch in Mumbai fraudulently issued Letters of Undertaking to overseas branches in favor of Nirav Modi.

Lapses at various levels:

• At the most basic level, it happened due to delinquent behavior of a few employees of PNB .
• Delinking of SWIFT and Core Banking Solution.
• Failure of bank management as the staffs were not rotated every 3 years as a norm for risk management.
• Failure of Audit committees.
• Partly a failure of the regulatory body the RBI as all LOUs have to be reported to the RBI on a quarterly basis. There is also a conflict of interest in having a central banker sitting on the board of a bank that RBI regulates.
• To an extent, Govt is responsible too as a majority stakeholder in PNB a PSB.

Impact:

• This fraud has been unearthed at a time when the PSBs are reeling under a pile of stressed assets of about Rs. 10 lakh crore. In an election year, it would now be politically difficult to press forward with the recapitalization plan of PSBs using taxpayer's money.
• The market sentiments have been hit. The shares of PNB have fallen. The credit off take from PSBs may suffer too. 
• In the long run, these frauds erode the confidence of the public in the banking sector.

Solutions:

• Bring wilful defaulters to book as soon as possible to create a deterrence.
• Improve corporate governance in private companies.
• Privatization of a few PSBs and consolidation of the rest can be considered to bring in professional management and to curb political interference in the functioning of banks.