RBI sets up committee to check on NPA divergences and SWIFT-like frauds

The Reserve Bank of India (RBI) will set up an expert committee to address the rising incidences of frauds and divergences in classification of bad loans.

"In view of large divergences observed in asset classification and provisioning in the credit portfolio of banks as well as the rising incidence of frauds in the Indian banking system, it has been decided to constitute an Expert Committee under the chairmanship of Shri Y H Malegam, a former member of the Central Board of Directors of RBI," the banking regulator said on its website on Tuesday evening.

This comes just a week after the biggest banking scam worth Rs 11,400 crore was disclosed by Punjab National Bank, alleging that diamond importer Nirav Modi and his uncle Mehul Chokshi's group firms connived with two of the bank's employees to fraudulently receive multiple Letter of Undertakings (LoUs) to seek loans against them.

Amid risks arising from the potential malicious use of the SWIFT infrastructure, it had "alerted at least on three occasions since August 2016, confidentially cautioned and alerted banks of such possible misuse advising them to implement the safeguards detailed in the RBI’s communications, for pre-empting such occurrences".

"Banks have, however, been at varying levels in implementation of such measures," RBI pointed out.

Since the last few quarters, most banks including top ones like State Bank of India, have had to make disclosures of its large divergences that occurred while classification of their NPAs (non-performing assets) in comparison to RBI's assessment.

The committee will look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment and the steps needed to prevent it.

It will also check the "factors leading to an increasing incidence of frauds in banks and the measures (including IT interventions) needed to curb and prevent it; and the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such divergence and frauds," RBI said.

The central bank said that as a part of its ongoing efforts to strengthen the supervisory framework in the country, it has been issuing necessary instructions to banks from time to time on a variety of issues of prudential supervisory concern, including the management of operational risks inherent in the functioning of banks.

The members of the expert committee will be: Bharat Doshi, Member, Central Board of Directors, RBI; S Raman, former Chairman and Managing Director, Canara Bank and former Whole-Time Member, SEBI; and Nandkumar Saravade, Chief Executive Officer, Reserve Bank Information Technology Pvt Ltd (ReBIT) and A K Misra, Executive Director, RBI will be the Member-Secretary of the committee.