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Punjab National Bank fraud points to Reserve Bank of India failure: Govt

Investigators close bank branch at heart of $1.77bn scam

MUMBAI: A woman speaks on her phone while a journalist waits next to the sealed entrance of the Brady House branch of the Punjab National Bank (PNB) which had been sealed in Mumbai yesterday.—AFP

MUMBAI/NEW DELHI: India’s government has said the $1.77 billion fraud at state-run Punjab National Bank was a “manifestation of supervisory failure” at the country’s central bank, local media reported yesterday.
In a letter to the Reserve Bank of India (RBI), the government said the failure to detect the fraud, the biggest ever in India’s banking sector, raised questions about the central bank’s “efficacy of supervision to detect and check systemic failure”, NewsRise and other local media reported.

“Either the framework designed by RBI to prevent and detect such frauds is inadequate or RBI is unable to ensure its effective implementation,” they quoted the letter as saying. The RBI did not immediately respond to a request for comment yesterday, which was a holiday in Mumbai. A finance ministry spokesman declined comment. Rajeev Kumar, the top government bureaucrat overseeing banks, told Reuters in New Delhi the finance ministry had written to the country’s banks to take effective steps to avoid a repeat of a PNB-like fraud. Kumar declined to comment if the government had written to the RBI.

The government action comes as federal police briefly locked down the PNB branch in south Mumbai that was at the heart of the scam and continued searches yesterday to gather evidence. The bank would have been closed yesterday anyway because of the holiday. A source at the Central Bureau of Investigation (CBI) said the branch was likely to resume operations today.

Besides searching the premises, the police also questioned more PNB officials yesterday, the CBI source said, taking the total number bank staff who have been questioned so far to 13. Three people, including two employees of PNB, India’s second largest state-run lender, were arrested and presented before a Mumbai court over the weekend in the case that involves billionaire jeweler Nirav Modi. Police also questioned some executives from Nirav Modi’s group, the source said.
The bank has said that the two employees arrested by police colluded with companies belonging to Modi and another jeweler Mehul Choksi, who heads jewelry retailer Gitanjali Gems Ltd and other companies.

Jeweler Modi, whose clients include Hollywood stars such as Kate Winslet and Dakota Johnson, has not commented on the allegations. Police have said Modi and his family left India before PNB filed a complaint on the alleged fraud. Choksi has also not commented, and police have said he also left India last month.
PNB shares plunge

Shares plunge
PNB has said the two bank officials issued fraudulent letters of undertaking to overseas branches of other Indian banks which lent money to the jewels based on the guarantee from PNB. All the letters of undertaking were issued by the two employees who were working at the Brady Road branch in south Mumbai. PNB shares slid for a fourth straight day yesterday, closing 7.2 percent lower. The selloff has wiped out about $1.7 billion, or more than a quarter of the bank’s market value, since it disclosed the fraud last Wednesday. Meanwhile in a sign of the widening fallout from the PNB case, shares of Choksi’s Gitanjali Gems fell 9.9 percent after its chief financial officer and company secretary resigned yesterday. In a letter shared with stock exchanges, Company Secretary Pankhuri Warange said she was resigning because of the company’s lack of disclosure despite her advice to be forthcoming.

“I have advised the management on the required disclosures to be made. There is however no consensus in my opinion on the disclosures to be made and that of the management, and in these circumstances, my conscience doesn’t permit me to continue with my position,” she wrote.

Warange did not disclose additional details. The other executive, Chief Financial Officer Chandrakant Karkare, cited his wife’s health as the reason for his resignation, according to a Gitanjali filing to stock exchanges. A representative for Gitanjali, which last week denied Choksi’s involvement in the alleged fraud, did not respond to requests for comment yesterday.

Banks hit
Other bank stocks with exposure to the fraudulent transactions that PNB says began in 2011 also fell. UCO Bank, another state-run lender that has said it had nearly $412 million in exposure to the fraudulent transactions carried out at PNB, closed 5.3 percent down.

Among other lenders which have said they had exposure to the fraudulent transactions, Union Bank of India fell 7.4 percent, while State Bank of India closed down 1.2 percent. Including direct loans given to companies of Modi and Choksi, Indian banks are at the risk of taking a hit of more than $3 billion after the fraud, according to an internal tax department note seen by Reuters.

A finance ministry spokesman however said yesterday the tax department had not submitted any formal note on the investigation yet. “There are many internal investigations going on, there is no note that the department has submitted,” the spokesman said, responding to the Reuters story.
In another case, the CBI registered a case against pen maker Rotomac Global and officials of various banks in connection with an alleged scam to siphon off bank loans worth 29.19 billion rupees ($454.4 million). – Reuters

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