The finance ministry has sought details from the Reserve Bank of India regarding possible systemic failures linked to the Nirav Modi-Mehul Choksi-triggered fraud at the state-run Punjab National Bank, a move seen as putting the onus of the lapses for the £1.13 billion scam on the regulator.
Many interpreted the letter from the department of financial services as just short of seeking an explanation for the fraud that went undetected for over six years during which neither the bank's auditors, not the regulator's inspections had thrown up any red flags. So far, RBI has maintained a studied silence except issuing a statement blaming the fraud on "operational risk" due to "delinquent behaviour" of a few employees and "failure of internal controls".
The finance ministry and RBI have sparred many times over the direction of interest rates and were involved in many other turf battles but this is the first time in recent memory that friction has erupted over a regulatory issue. In fact, the RBI's role - despite its claims of a robust supervisory structure - has come under the spotlight due to a series of lapses at banks, including the massive pile-up of bad debt.
While the government can instruct the RBI under the current legal framework to initiate action, the power has remained only on paper. The fraud has triggered tremendous unease in the government and it is under pressure to not just nab the fugitive diamond traders Nirav and Choksi but also fix the systemic gaps in the banking sector. Sources said the government has sought the regulator's inputs on how systems and processes can be updated to prevent such frauds in future apart from its opinion of the failure of the auditors to detect the fraud that has been going on since 2011. They said the government is looking at fresh steps to crack down on financial frauds.
