As the country is finally coming to terms with the biggest loan fraud in recent history, the Indian BFSI sector is beginning to analyse and figure out the loopholes in the transaction process.
Punjab National Bank revealed that its employees issued unauthorized and unverified letters-of-undertaking that allowed Nirav Modi’s companies to secure credit from Indian banks operating outside the country.
The multi-crore swindling operation stems from the fact that the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is not a part of the core banking system in a lot of public sector banks in India.
Banks to integrate SWIFT with core banking
According to Reuters, RBI’s mandate – comprising of more than two dozen directives, instructs banks to not send any transaction message on the SWIFT system. Furthermore, it directs banks not to issue loans or guarantees without an entry in the core banking system. These measures are to be incorporated by April 30.
In addition to this, the RBI highlighted the need to tighten the SWIFT infrastructure, and put a limit on foreign currency payment instructions involving individual beneficiaries. The mandate also proposes an additional layer of security for high-value transactions.
Last week, the Reserve Bank, in a press statement stated that the potential malicious use of the SWIFT infrastructure has always been a component of banks’ operational risk profile. The RBI also proposed to set up an expert committee under YH Malegam to look into the reasons for high divergence observed in asset classification and provisioning by banks.
The committee will also address the reasons for rising financial fraud and counter-measures to curb and prevent them. The counter-measures, RBI stated, will also list IT interventions and assess the role and effectiveness of various types of audits.
On February 16, Jose J Kattoor, Chief General Manager at RBI stated that the fraud in PNB was a case of operational risk resulting from the failure of internal controls. Additionally, he said that RBI has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action.