The Reserve Bank of India may crack the whip on its senior officials in the wake of the massive ₹12,600-crore fraudulent letter of undertaking issuance scam at Punjab National Bank (PNB).

Central bank insiders say regulatory officials who dealt with PNB in various capacities may be hauled over the coals following the central bank’s Board for Financial Supervision (BFS) taking stock of the situation at a recent meeting.

Under RBI’s scanner are its officials who inspected PNB’s Brady House branch at Mumbai (where the LoU fraud took place) as well as the bank’s Delhi headquarters, those in charge of the supervisory function at RBI, and the central bank’s representative on the state-owned bank’s board during the period when the scam was perpetrated.

Assessing LoUs

The BFS is understood to have assessed how fraudulent letters of undertaking (LoU), issued between 2011 and 2017 at PNB’s Brady House branch in Mumbai in favour of firms linked to diamantaires Nirav Modi and Mehul Choksi for importing pearls and diamonds, went undetected despite internal and external audits and the central bank’s own inspection of the branch. The fraudulent LoUs issued by PNB were discounted by overseas branches, mostly based in Hong Kong, of Indian banks such as Allahabad Bank, Axis Bank, State Bank of India, UCO Bank, and Union Bank of India and funds were credited to PNB’s Nostro account with these banks. The ‘suppliers’ of these diamantaires received payments from this account.

In the backdrop of the investigative agencies turning the heat on top bankers, asking them to join investigations, and arresting a few PNB officials, the BFS is understood to have weighed the possibility of fixing internal responsibility.

An e-mail sent to the central bank seeking comments on the action contemplated by it against its officials remained unanswered.

A regulatory official said the disciplinary action that the central bank can take against its officials for violation of service conditions include reprimand, transfer and demotion. In extreme cases it could also lead to termination of service and stopping of pension.

Operational risk

The RBI, last month, said the fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls. The central bank added that it has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action.

The BFS oversees the functioning of Department of Banking Supervision, Department of Non-Banking Supervision and Financial Institutions Division and gives directions on the regulatory and supervisory issues. It is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.

The Board has four Directors from the Central Board as members and is chaired by the RBI Governor. The Deputy Governors are ex-officio members.