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RBI Needs To Undertake Operational Risk Audit Of Banks, Says Former Deputy Governor

It’s time for a number of audits to protect banks from rising instances of fraud, says former RBI Deputy Governor.

A woman looks on as CBI team seals Punjab National Bank’s South Mumbai branch at Brady House in Mumbai. (Source: PTI)
A woman looks on as CBI team seals Punjab National Bank’s South Mumbai branch at Brady House in Mumbai. (Source: PTI)

The Reserve Bank of India needs to undertake an “operational risk audit” of Indian banks to protect the system against frauds, says HR Khan, former deputy governor of the central bank. Khan was commenting on the RBI’s communication to lenders to strengthen the SWIFT messaging system, seen to be at the core of the Rs 11,400 crore Punjab National Bank scam.

On Tuesday evening, the RBI reiterated its directions to banks to monitor SWIFT messaging more closely. It added that previous such warnings have been ignored. The regulator has also set up a committee led by YH Malegam to look into a host of issues, including detection of frauds.

Khan believes the RBI needs to go a step further.

“In a mission like mode we should do an operation risk audit of banks and create a template to see if the RBI's instructions have been properly followed,” Khan said in an interview with BloombergQuint. The information from the audit should then be given to the new committee proposed by the RBI to strengthen the banking system against fraud, he added.

The committee should look into the effectiveness of the Central Fraud Registry system, the Fraud Reporting System, the ‘red flag’ system and how effectively the information technology system is integrated with these, Khan said. They then need to come up with controls to prevent the rising instances of fraud, he said.

There is also a need for surveillance of SWIFT messaging system, used by banks across the world to transfer money. The SWIFT messaging system has been at the center of other frauds at well, most notably, the attempt to defraud the Bangladesh Central Bank in 2016.

One doesn’t doubt the robustness of the (SWIFT) system, but the peripheral connectivity of the other systems and whether there can be misuse of that. There is need for a global surveillance.
HR Khan, Former Deputy Governor, RBI

Khan also suggested that overseas branches of Indian banks be subjected to greater scrutiny. “Time has come to revive audit of foreign exchange transactions in branches because quite a few instances of fraud have happened,” Khan said.

In PNB’s case, loans were sanctioned by overseas branches of Indian banks based on LoUs issued by PNB. However, bankers believe that there wasn’t adequate due diligence on the part of these overseas branches. Previously, in 2015, a fraud had been detected at Bank of Baroda, where Rs 6,000 crore in illegal forex transactions were detected.

Watch the full interview here.