Several systemic loopholes led to PNB loan fraud, says ICAI panel

A high-power group, constituted by the Institute of Chartered Accountants of India (ICAI) to look into the PNB loan fraud case, has found systemic failure at many levels that led the fraud in the first place and then failed to detect it for a long time.
 
The group found that Nirav Modi's company was granted loan despite his company having only current account with the Brady House branch of the bank. "When there is only current account, no credit facility should be granted -- neither the letter of undertakings (LoUs) nor Letter of credit (LoCs)," says SB Zaware, member, Central Council, ICAI.
 
The group also observed that LoUs are only used by Indian banks to offer loans to companies. That is primary reason why LoUs in the Nirav Modi case were only issued to foreign branch of Indian banks. Any other foreign bank would not have accepted LoUs.

"LoUs unlike LoCs, are unconditional undertakings, which means if payment is not made on the due date and demand is made, the payment has to be made by PNB without asking for any documents," says Zaware, who was presenting the initial finding of the group to media persons in Delhi today.
 
The group also found that the concurrent audit of the books was done by the bank's internal employees who were not chartered accountants. The group said that while the bank used its own resources for concurrent audit, they failed to detect the frauds running into crores.
 
It, therefore, has recommended that banks should appoint external agencies for concurrent audit.
 
It also found that the there is lack of understanding about the Swift messaging system among the staff of the banks. The group also said that there is an urgent need to Swift messaging system should be linked to the core banking system (CBS) of the bank.
 
Zaware said that RBI in November 2016 had issued a confidential circular to banks probably warning them about the possible risks associated with LoUs and also asked the banks to link their Swift messaging system with their CBS by April 2018.
 
However, the group noted that since the circular was confidential and not in public domain, the warning against LoUs may not have reached to all stakeholders.
 
It also found that RBI did online inspection of the bank's systems but no physical verification was done. "Had they done a physical verification, the fraud could have been detected," observed the high power group of ICAI.
 
It also raised the issue of last minute appointment of central statutory auditor as well as branch auditors.  Most of the appointments are done almost in the last week of March due to which auditors do not get enough time to audit the accounts properly.
 
The group recommended that appointment of central auditor should be done in the first quarter of the financial year and branch auditors by last quarter so that proper planning of the audit can be done.