 Hello and welcome to NewsClick. Today we have with us Thomas Franco, Secretary of IBOC to discuss the PNB issue. Hello sir, welcome to NewsClick. Thank you. Sir, can you give us a little background about the PNB issue because it's all mired in a lot of technicalities and it's quite difficult for us common people to understand it. So the simple, the bank has a system called the letter of undertaking. When a customer who has import or export, he approaches the bank, he requests the bank for the letter of undertaking which is nothing but a guarantee for a loan. That guarantee is issued to a foreign bank branch. Based on which that particular bank will give him, give the borrower loans abroad. These loans are cheaper abroad so people prefer to avoid the loan abroad because the interest rate is cheaper there. Here the procedure for issuing a letter of undertaking is that the bank will get adequate security either in the way of deposits or in the way of collateral. Normally it is issued for a period of 90 days. So within that 90 days the borrower abroad, the same customer who has company is abroad or another company which is supplying goods to this person who is in India, he will repay the loan to the bank which is abroad. Then the LOU gets cancelled. Now here in the case of the Punjab National Bank, what mistake has taken place or what fraud has taken place is that many LOUs have been issued in the month of February 2017 without taking any security from the customer. Though this borrower Mr. Nira Modi has an account with a credit limit of around 1000 crores, that loan account was not utilized. No security was taken, no collateral was obtained but particular officer in collusion with another two officers has issued only a swift message. Swift is nothing but society for worldwide interbank financial transactions. That is an electronic system through which communication between banks takes place. The normal procedure is once an LOU is sanctioned to a particular customer, a swift message will be sent to the foreign bank from here which will be a coded message which will have all the details of the guarantee for whom it is given, the credit worthiness of that borrower, what kind of business he is doing and for what purpose this guarantee is given. So once that message is received at the other end, the code is verified and if it agrees that particular bank will take it as legal and it will provide credit to that particular customer abroad. Now suppose it is for 90 days. Within 90 days if he pays back to that particular bank, there is no liability for the Indian bank which issued the LOU. The period is over, it seems to exist. But in this particular case in February I understand there are 5-6 transactions which are swift messages sent by Punjab National Bank Bombay to foreign countries, to foreign branches of Indian banks itself. Based on which that person has been given a credit and this LOU has been issued for a period of around 345 days. Though there is a provision that in case of certain high value customers, depending on the type of transaction which is taking place, it can be given for one year also. So this particular LOUs have been issued for 340 to 45 days. None of them is due for what you call invocation. Only if the money is not paid at the foreign bank branch by end of February, those banks will invoke the guarantee from the Indian bank. That is the Punjab National Bank which has issued this LOU which is just a simple guarantee. First thing people have to understand is that as of today there is no loss actually. There is only a notional loss. If these customers are paying back to those bank branches abroad in time, that is probably within February end, then the liability of the LOU gets cancelled and the Punjab National Bank may not lose any money. But if they don't pay, then those banks will invoke the guarantee and the Punjab National Bank will have the liability to pay. This is a simple operation of an LOU and street. Sir, but we have also heard from newspaper sources, of course nothing is very specific, but people are saying that this LOU which has been given in February was actually given to cover previously taken credit from abroad. It can be correlated that way from 2011 onwards, this company has been enjoying this facility. So 90 days you take one LOU, after 90 days you come for another LOU. The same fund you are using, you are recycling that fund. So what happens is, say for example, in 2011 for 200 crores LOU was issued. That person has availed the loan abroad. On the 90th day he pays 200 crores and on the first day he is asking the PMB of India, Bombay, to again provide another LOU for 90 days, again avails that credit or this time he asks for more instead of 200 he asks for say 300. So that way he might have been doing it over a period of time, increasing the limit. That is why now the limit has come to 11400 out of which around 1000 crores is only a credit limit. So around 10400 crores is the LOU outstanding. Also sir, from what we hear from the news, this person, the person who is supposed to have colluded with Nirav Modi, the officer of PMB, by all means he sounds like an honest and upright person because people are saying or his colleagues are saying that there has never been any problem with him and he has been working in that branch for a long time. So what is really the issue? Is it a fraud or is it something that is taken for granted in banks that happens in a normal course of time, that you trust this, your customer and then use these loopholes within the banking system rules? No, see banks procedures are very clear. How big the customer may be, whatever may be his credit worthiness. An LOU or a guarantee cannot be issued without adequate security. So now though he might have been honest, he might not have taken a bribe. But if he has given this LOU without security, the procedure lapse is there, it is a mistake. So action will be taken. That is why they have already suspended around 20 officers. Though directly involved will be only three people who are handling the swift message. There are other people probably because of vicarious responsibility that effective supervision has not been taken place, proper audit has not been done, supervisory lackness is there. Maybe because of this already 20 people have been suspended. There are large transactions audit take place probably maybe in the same month or the next day. So how can this, I mean how can this escape for so many years? See, there are three types of audits. One is an annual audit done by a statutory auditor who is a chartered accountant, that is on an annual basis. Internal audit takes place normally once in two years. Then there is a reserve bank audit, wherever there are large advances under section 35A of reserve bank of India, reserve bank itself contacts audits. Unfortunately none of these audits have pointed out these because this was not linked to the core banking solution. So the problem is with the swift. It is high time, world over and within India reserve bank takes immediate steps to see what is the problem with this reconciliation system in swift. This is not the first time it has happened. It has happened in Union Bank of India, it has happened in Bangu Paroda recently itself, one or two years back. At least by that time reserve bank should have woken up though they have sent some advisory report to the banks that you should be extra cautious. The reconciliation part with the swift message and the nostril account, that has always been a problem and this has led to this kind of fraud, which is the same models apparently is repeated again and again. So both the government as well as the reserve bank has to take responsibility for this, that why they have not been supervising, why they have not put in a better system of reconciliation that is also to be answered. Sir, are you saying that the swift transactions, when audit happens the swift transactions are not looked at, that the audit does not go through the swift transactions and try to reconcile them with the existing core bank transactions? They will definitely have to go through, but what happens is, see suppose I have issued a LOU for 90 days, it is an OOG, it is not overdue. When I go as an auditor, I may not see it as a big issue, because no claim has come, only if somebody is going to claim that you issued an LOU, the borrower has been given credit, he is not repaying, so we are invoking the guarantee clause. Then it becomes an issue. So even auditors might have had an oversight, though it is a mistake, they should have scrutinized it better, if they would have scrutinized it properly, they would have come to know. Sir, what is the standard of IBOC on this, because it is an officer's consideration, so you have a better idea of what are the problems, what are the look goals, what are your concrete demands in this regard? One, we should take stringent action against the officers who are colluded with the borrower, that should be a message. But there should not be a creation of a panic, saying that as we got it happened in one branch of Punjab National Bank, there must be similar thing all over, that I don't think is a correct version. This is an isolated case, which has to be dealt with very firmly. But what is more important are two things. One, the swift reconciliation system, NASWA account reconciliation system has to be improved, the look goals have to be arrested immediately. Earlier, we had a system called TT Payable, where through telegraphic transfer, we transfer the amount through a coded message, which is verified again using a code, and that reconciliation used to be monitored every week to see that the real transactions only have taken place. A similar thing should have been established for shift also. Unfortunately, it appears to be not working that way. So that has to be corrected and this only reserve bank in our country can take that responsibility to do that and inspect banks to create a revised system and procedure. Number two, now people are connecting everything to the non-performing assets and performance of the bank. One author has written today an article that it is high time we privatize the public sector bank. This has nothing to do with private sector or public sector. Similar frauds have taken place in public sector banks as well as private sector banks earlier. There are a number of cases which I am aware. We know of the case of the global trust bank which went bust and it has to be taken over by the Oriental Bank of Commerce. But today, the non-performing asset is something which has to be addressed quickly for which whatever reserve bank of India is not doing adequate. More than this fraud, the biggest problem which has come to the banking industry is because of the announcement of the Reserve Bank of India a few days back that all the loans which are NPA for 180 days, they should be transferred to the NCLT. The NCLT already has more than 2000 cases which is pending with that and it will find it very difficult to solve these cases quickly. But the most difficult thing for the bank is that when it is just a substandard asset you have to create a provision for just 15%. Whereas the moment an NPA is transferred to NCLT, you have to create a provision of 50% because of the RBA guideline which the guideline itself is the wrong thing. Because these loans have been secured through collateral securities, there is every possibility that we will get back a considerable amount back. But this creation of 50% provision immediately will be affecting the banks and all the Indian banks will go into losses because of just a change in the norms by Reserve Bank of India. So they have to have a real look otherwise the banking industry will plunge into a crisis. So you think that instead of making these mindless rules, Reserve Bank actually should be more interested in enforcing the checks and balances within the banking system. Exactly. That is the crux of the issue. The checks and balances have to be monitored by the Reserve Bank of India and by the Finance Ministry. Another point here I would like to highlight is that, see, there are no board officer director or employee director in the banks. So whatever audit is taking place or reports are given, all the loan sanctions or waivers are done which is all done in the boards where there is no transparency as on date because there is no representative from the workmen or officer which is mandatory as per the law which this government is not implementing. And Reserve Bank has a role there also. The board of directors which is an officer director or employee director as per the law is to be appointed in consultation with the Reserve Bank of India. Banks have sent their recommendations but they have been kept on hold for so long and a government which talks about transparency is remaining opaque in this area. So immediately both Finance Ministry and Reserve Bank should intervene and appoint officer director or employee director. Thank you for giving us this time and we hope to get back to you on this issue in the coming few days.