The Indian government asked Punjab National Bank to conduct a forensic audit into why a 114 billion-rupee fraud remained uncovered from 2011 until now, the Business Standard reported, citing sources.
At the same time, the Reserve Bank of India will conduct an independent inquiry to determine if any banking and regulatory laws were breached while the fraud was going on, senior government sources told the publication.
Punjab National Bank said Feb. 14 that it has uncovered about 114 billion rupees worth of fraudulent transactions at one of its branches in Mumbai. A day later, the bank disclosed the scam came to surface after the partnership firm of Nirav Modi presented a set of documents in a Mumbai branch in January and sought buyers' credit for making payment to overseas suppliers.
When the bank's officials asked the firm to present a 100% cash margin for issuing a letter of undertaking for buyers' credit, the firm contested that it has been using such transactions for several years.
Following scrutiny, the bank found that the branch's officials issued letters of undertakings to the Modi firm through SWIFT in the past without obtaining the necessary approvals. Punjab National Bank CEO Sunil Mehta said Feb. 15 that the fraud started in 2011.
The forensic audit will look into why the transactions unnoticed for such a long time, a government official told the Business Standard.
India Financial Services Secretary Rajiv Kumar said the bank has sufficient funds to provision for losses stemming from the fraud, adding: "This is an isolated case of a single branch and will not likely to escalate to other banks."
Meanwhile, Union Bank of India said it has exposure with Punjab National Bank through its foreign branches as counterparty under various letters of undertakings. The bank said its outstanding exposure is approximately US$300 million and the bank is fully secured and confident that it will receive the payment.
In addition to Union Bank of India, Axis Bank Ltd. is said to have offered credit based on letters of undertaking issued by Punjab National Bank, The Economic Times reported.
As of Feb. 15, US$1 was equivalent to 63.93 Indian rupees.